Swing Trade Setups That Don’t Trigger: No Harm, No Foul

On November 7, a subscriber e-mailed to ask why we were targeting Market Vectors Coal (KOL) for potential swing trade buy entry (click here to see the original blog post explaining the technical trade setup). Specifically, this individual asked why we were looking at buying KOL when “Obama hates coal.” Our reply was two-fold.

First, we reminded him that our short-term trading system is based on technical analysis of price action, NOT news events. Although it is a common conception that stocks are driven by news, this is rarely the case; rather, the price action typically occurs first, and then the financial media subsequently comes up with whatever reason they can think of to justify the reason the stock went up or down for the day.

Basing trading decisions on anticipated reactions to news events is rarely a profitable strategy because the expectation of the news is usually already built into the price, which therefore frequently leads to the opposite the price reaction one might expect.

But more importantly than this, the second part of our reply to the subscriber was a friendly reminder that KOL did not even hit our exact trigger price for swing trade buy entry that was listed in the ETF Watchlist section of our newsletter (buy trigger was above the intraday high of November 6). This served as a great reminder of the danger of jumping the gun in trading by buying a stock or ETF before it actually hits the preset trigger price.

Since our trigger prices for buy entry of swing trades are based on technical levels of near to intermediate-term support or resistance, trying to save a few pennies by entering a trade before it actually trades through our trigger price is a foolhardy mistake that can easily be avoided by checking your greed at the door.

Given that KOL tumbled sharply yesterday (more than 3%), it has simply been removed from our ETF Watchlist as a potential buy candidate. No harm, no foul. Always staying grounded in reality, rather than in “hope” mode, is the key to being a consistently profitable swing trader over the long-term.

Although active traders who are patient, disciplined, and grounded in reality will NOT make profits every single month, they will consistently end up with a better performance than the overall stock market over the long-term because they will miss the substantial losses of the big down years. A good example of this is when we actually made a small profit on our ETF and stock trade picks during 2008, at a time when the major indices fell more than 30%.

Original post