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Wednesday, February 21, 2007

Running through mud

We always talk about resistance from the OR high (or support from the OR low), and if you are entering a trade below the OR high or above the OR low those trades are riskier. That is why I always put in my standard disclaimer* in those situations:

*as with any entry below/above a previous high/low (in the case of my charts, the opening range (OR) high/low), you need to watch for resistance/support as price approaches those levels. If it stalls, you want to exit. If it breaks through, the odds are good you will have a move to the corresponding Fibonacci extension.

It may be easier if you think of those areas as a mud puddle. You can run through it, but it will slow you down. If the mud puddle is deep and thick, it might stop you all together. Or, you might get through but lose some of your forward momentum - thus stalling out shortly afterwards. On the other hand, the mud puddle might not be that deep or thick, and you can make it through and keep going just as strong as before.

Any of these scenarios can happen, but the bottom line is there is increased risk if you are running through a mud puddle. Just as there is increased risk going long with overhead resistance, or going short with support below your entry (the analogy applies to buying below/selling above the OR high/low, or any other areas of support/resistance). As I always say, it is fine to enter those trades as long as you are aware of the increased risk, and manage your positions accordingly.

Just make sure there are not better set-ups available!



Barb said...

Good analogy.

Charles (in San Fran) said...

Cool way to look at it.

ADD Trader said...

I have seen this scenario a lot lately. Opening bar has a long upper shadow, and stock stays in a consolodation zone til the afternoon, well below the OR high. If there is a break out of the zone later in the day, there is often a tradable run up to the OR high. Also the OR high doesn't seem to slow the run down much. So my long winded question is, is an entry below the OR high less important on a late day trade?