From Failed Moves….Come Fast Moves

There are old traders, and bold traders, but no old bold traders.  That saying really doesn’t have anything to do with this post, but it’s true, and I like to recant it once in a while, sorry.

If you pay attention, the market teaches you lessons, just through osmosis.  You don’t learn to be a good trader in school, there are no courses you can take or people who can tell you exactly how.  The market is one big psychological experiment after all, and it is designed to take money from people who either have no balls or can’t manage risk, and give it to those do.  Intelligence alone gets you nowhere in this game, only when you can take that intellect and build an understanding of how the market behaves will you be successful.

I used to live with a friend who was a great oil trader on the NYMEX floor.  He told me once that he loved it when the firms brought their new recruits from Harvard, Yale and Princeton down to the floor for the first time.  He recounted that these kids could do linear regression in their head, but once they stepped into the pit they were completely lost, like scared little children.  Jack was a very smart guy, don’t get me wrong, he graduated from Maryland, but he had spent many years in and around traders and trading floors before he stepped into the pits.  The only way you can get an education in the market is by being in and around it.  For the lucky few who grow up around the market and are exposed to it from a young age the learning curve is easier, for those that didn’t, more often than not loses are your tuition.

I want to talk about a specific pattern that is part technical analysis and part gut feel, something that you only learn to recognize after having seen it in action many times.  This pattern takes place on many different time frames due to  the nature of its psychology.  We call it, from failed moves, come fast moves.  I want to highlight this with a look at a position that I recently took in the British Pound.


I sold short the $GBPUSD as it broke through both the 200 day moving average and its 55 day donchian channel on 9/24.  The Pound looked set for a hard fall here having put in a head and shoulders pattern throughout the summer while losing momentum as shown in the MACD divergences.  My stop original stop was set at 2 ATR above the entry as per my system rules.  We saw the cable break hard off the entry followed by two weeks of consolidation below the 200 day moving average.  This pattern was setting up very bearish with the 20 and 50 day moving averages moving in the negative direction.  It looked as if a break below 1.58 would lead the way to another leg down.

We saw the Pound break below 1.58 on the 12th and then again on the 13th.  But that afternoon, it jumped back above that line again and the 50 hour moving average went flat.

There is a lot of noise when you watch an asset trade on the hourly time frame, it isn’t all important.  What is important is how a stock reacts around key levels.  1.613 or there abouts had been an important resistance level twice in two weeks, and we say hard rejections there.  It was obvious that if this level was broken more upside was to be seen.  I thought the same of 1.58, a break down through that level would lead to more downside as support would be breached.  The action on the 13 was telling in that although support was broken, no panic ensued from the longs.  As the Pound made a strong push up and through the 50 hour moving average the panic from shorts was evident.  The 50 hour moving average had flipped around quickly and was pointed skyward.  The bears were trapped and they knew it.  Sellers below the support level were forced to cover quickly as momentum shifted.

The failed move lower produced a fast and powerful move higher.  We went on to break the resistance level at 1.613 and are now surging.  I covered my position around 1.62 for a loss, but what I can honestly describe as a good loss.

If you have an existing position in an asset and see this pattern emerging I would recommend two things.  One, reevaluate your stop.  Although I trade a system I won’t hesitate to move my stop if I believe the trade is broken or looks to be so imminently.  In this case I moved it from the original two ATR above the entry to just above the previous resistance area saving me money.  Second, watch for a strong quick move in the direct opposing the trend.  Powerful moves signal an absence of players in one direction, if traders aren’t willing to step in to support the trend, something has changed.

If you are observing an asset which has failed its breakout or breakdown and is exhibiting these characteristics, stalk.  Look for two or three higher highs off a failed breakdown or two lower lows off a failed breakout.  Take an entry counter to the trend and set your stop below one of the previous highs or lows.

Different assets behave with their own little quirks, but in the end there are certain patterns which persist throughout all time frames and markets, learn to know them.



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