One dilemma facing position traders is how best to place a trend-following position when there is no obvious low-risk entry point. When a market is mid-trend (let's say up), support can be quite far away. And in any case, do you really want to place a stop just below that support, so it can get taken out by a few ticks, then the market reverses? Yet you don't want to stay flat and miss the trend entirely. Yes, you may have to take more risk, but then if you stay flat and wait for a retracement, you are taking the much more costly risk of missing the entire move for the sake of a couple of points. So the solution would appear to be just get in, set a stop at the same level as you would have done had you entered at the right time, and put the missed profit down to experience. But then you are risking a much higher % of capital on your initial entry. Should you therefore reduce size such that the % of capital risked is the same as if you had entered at the right point? An even more tricky dilemma is what to do if you have completely missed a large move (e.g. if you have been on vacation, off sick, or for some reason just didn't pull the trigger earlier). Now, you really do have a lot of risk - a 50% retracement (not uncommon during trends) or a move to the 50 day moving average, would hand you a nasty loss. And on the other side, the market may be somewhat ovextended, so you likelihood of profit may be much lower than if you faded a short-term countertrend. Yet the market is still trending with momentum on its side, and you don't want to miss the rest of the move. Again, we can use the position size to reduce the risk. But in this case, it may make the position so small that it's hardly worth bothering with. Any solutions to this dilemma? I have one or two ideas, but would be interested in hearing what people have to say.
Very good question. In this case I only see 4 options. 1. Wait for the next correction before jumping in. 2. Fade the trend at the next Ovrbt position-(uptrend) or Ovrsld position -(downtrnd). 3. Do nothing. 4. enter at the current open or close. Beyond this I see no other option.
Seems like you just answered your own question. If there is no obvious low-risk entry point, then why would you enter? The only reason you would enter is because you are anxious to make a trade. The toughest part of swing trading - and that which clearly divides winners from losers - is the ability to sometimes do absolutely nothing. Because whether it is waiting for the right setup, or waiting for a profit target to be hit, it is in the waiting that money is made. If you have any doubt, backtest a profitable strategy buying pull backs, including a rule involving a broad market index such as the S&P. Look at the strategy when the index is high, or when it is low. And you will likely see a very strong indication that opening long trades when the index is high is not on average a smart move. However, waiting for the index in general to pullback, then dialing into stocks that fit your criteria, can reward your patience greatly.
Some people with set ups and R/R management go through this transition. Instead of entering and then exiting at their prescribed target value, they give the entry a grater opportunity to perform. They are at a point that they realize making more than target profits does not harm them in any manner. What they do is assess the immediate situation and see if it precisely meets the conditions of their set up. If it does, they presume an entry (they are already in) and set their protection and new target. At some point they further discover that this test and continuation can be done more frequently and they mark off standard portions the set up trade for doing this. It drives them away from the concepts of having to either or both tighten stops and/or diminish the target for late entries where no reevaluation is deemed a posibility. What is the downside for invoking this approach? Most often the target is not reached and if a retrace occurs you loose lest money on the enhanced stop used for protection. It also brings up the possibility of considering how to optimize the use of time when the target is no longer being attained. when you are not reaching a target, that is a terrific time to assess whether or not the set up is still functional. If it isn't you simply exit right then and there. You are shy of the target but you are not continuing to be at risk when a set up has disappeared on you.
Todd Harrison has a guideline for this type of situation:''Missed opportunities are easier to make up than losses." I have found an excellent way to take a big whopping loss is to bend your rules because you are annoyed you missed an entry or exited too soon. You missed it and you are never going to get it back. Deal with that reality and move on.
Buying ATM/just OTM Put options on long/Calls on short positions are a good option to safeguard your money and keep yourself safe from sharp moves against you. Go for the longterm options (year+) so youll be paying relatively low premiums.. --> If you eliminate your position quick then premiums wont have dropped too much and the 'insurance' has been cheap, if you hold positions for a long time, fat chance that the dividends will have paid for the options
Market will give you nice moves for a very long time. Just forget about the ones you missed. (Of course you can still learn from them )
All of my meagre experience has shown that if you miss a move or see it too late then forget it and wait for the next signal (remember that I am a mech systems kinda guy). If you go outside of your system you increase the possibility of increasing your losses markedly.