January 19, 2014

Profiting from the pain of other traders

Let me be honest upfront... this is not an original concept or approach I have discovered. While I have experienced the pain, it never occurred to me that this situation could lead to more profitable trading. This was until I came across yourtradingcoach.com - an excellent site about contrarian trades and trading breakout failures.

The concept is simple and does not require you to have any initial position. But you can always study the charts and visualize what a trade could have been like. Next is the interesting part. So assume a trader was short on some signal but the market did not tank thereafter.

How would this trader feel? Happy? Upset? Or panicky? If he starts getting panicky, chances are high the markets will reverse. Now other traders who are similarly short will also cover the moment their SLs are hit. This reverse order flow will create the rally which you should attempt to profit from.

For eg., if you are long, you will expect the stock to rally and the trade to become profitable. But what if stock trades rangebound and candlesticks show signs of selling at higher levels? You will start getting panicky or frustrated or perhaps curse yourself for taking this trade.

Note that there is nothing wrong in buying the top. A top is always known in hindsight. What is more important is what you do after you realise you had a stupid trade.

Some sample charts... this is real / current market so I have no idea what will happen from here on.

ABAN... breakout after 400 is not leading anywhere

ADANI PORTS... say you were short on break of recent swing low. How would you feel now? The stock is not tanking and signs of buying are coming in AFTER the support breaks.

ARVIND MILLS... so bought at 153... now what? the breakout has clearly failed. So you can safely short. But if the short trade fails? How will you know the trade has failed?

BIOCON... last buy failed... now trend is down. What if stock closes above 470 tomorrow? How would the shorts feel?

CIPLA... I am not long but my approach would have called for a long trade above 410. But the sideways trading and candlesticks showing upper tails does not inspire confidence.

MOTHERSON SUMI... say bought on breakout / close above 204. How would you feel now?

RCOM... we had breakout failure of a long position... followed by a short trade on break of 127... how would you feel now? Where would your stoploss be and what would be your reaction to the event?

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