This is PART SIX (and the last one) of our series on accessing THE BATTLEFIELD TERRAIN (the current market conditions) before entering a trade.
PREVIOUS POSTS IN THIS SERIES:
PART THREE: TEMPORIZING GROUND
According to SUN TZU, one of our 5 star generals, GREAT DISTANCES is defined as two armies at a great distance apart. Because of this great distance it is best to rest and not put yourself at a disadvantage by chasing the enemy. THE CROSSHAIRS TRADER interprets this type of battlefield terrain as one that has recently had a strong advance in one direction or another over the course of several days: therefore, requiring rest before moving again. The market calls this a time of consolidation. This ground, just like ENTANGLING, is best avoided. The characteristics of this type of battlefield are as follows:
1. An extended move in one direction or another best measured by historical moves in the same direction. This move is usually at the end of a long trend (see ACCESSIBLE TERRAIN) where strong momentum has carried the stock a great distance for an extended period of time. Past movements is the same direction can be measured and compared to the current move. For instance, if in previous trends the stock moved on average 20% and has moved 20% in the current trend then the highest probability points to consolidation instead of a continuation of the current trend.
2 The move can find its resting place at the following: A) at or very near a moving average line such as the 21/50/200 SMA (simple moving average), also know as 21/50/200 TANKS. The resting place is much stronger if the move has taken some time to get there. In other words, the stock or index has moved from 50 to 65 over the course of two weeks and is now bumping up against 50 TANKS; B) at a point of strong resistance or support wherein buyers or sellers have made their respective trades in the past; C) a combination of A and B would be the strongest, especially if the Bollinger bands are also at a point of possible consolidation.
3. Indicators are in an overbought or oversold condition. This can be a purely subjective condition based on the indicators a trader watches and/or the settings of those indicators. The most widely used trend indicator is the MACD and when used in conjunction with the RSI can provide a highly probable indication of overbought or oversold areas. These are two of the indicators used by the THE CROSSHAIRS TRADER .
All markets must take a rest from time to time, just like a sprinter must take a rest after running a race. A resting stock and/or index indicate a healthy market and should be treated as such. However, during the rest there is really no need to trade when the best course of action would be to enter the battlefield after resting thus putting yourself in a position to take advantage of the next sprint to the finish line.
“If you are situated at a great distance from the enemy…fighting will be to your disadvantage.”
SUN TZU
TRADING IS WAR. PREPARE YOUR WEAPONS.
