Sometimes You Need To Override Your Trading Rules

Thursday September 8th we initiated two new swing trades into our portfolio.

The first was $CSX:

CSX_9_8

A very healthy and bullish looking chart giving us a follow through signal to get long as it pushed to new multi-month highs.

Here’s the exact alert we issued to our members:

ALERT- NEW POSITION Long CSX at 28.92 STOP 28.25

The second was $TMV , a 3X inverse ETF to the 20+ year treasury bond.

I prefer charting the underlying instrument when trading levered instruments, so here’s the setup in $TLT below.

tlt_9_8

We were trading the breakdown (short) of a new 2.5 month closing low as it fell through key horizontal support.

Here’s the exact alert we issued to subscribers:

ALERT- NEW POSITION Long TMV at 16.60 STOP 15.95

tmv_9_8

Both trades were entered near the close of the day and both were planning to be held for roughly 2 to 5 days.

But the very next day, we had an unusually sharp change in the character of the market.

We’ve been in a very slow and boring range across the major indices for many weeks, but by the open on Friday, September 9th, there were lots of indications that those dynamics were finally shifting.

  • Largest gap down we’ve seen in 2+ months
  • Breadth at the open at extremely bearish readings
  • Break of multi-week support
  • Spike in volatility

All of these factors together, signaled to us that the cool, calm, collected market we had yesterday was no longer what we were dealing with today.

Single day sharp shifts like this are rare, but these unusual circumstances do happen and they make for a good example.

The breakout in CSX that we just initiated yesterday no longer had a supportive market environment to rally in.

Instead of stubbornly sticking with our original stop loss facing such strong market headwinds, we decided it was a time to play defense and exit the trade off the open.

8 minutes into the day we issued the following alert to members to take the small loss.

6:38AM PST – ALERT- Exit CSX Long 28.72 (-0.20)

Now compare our exit, to where CSX closed later that day.

csx_9_9

We saved ourselves nearly a full unit of risk by exiting early.

Hindsight and using this one example might make us look like a genius, but realize this could have rallied in our faces without us as soon as we exited.

The key takeaway is that we have a process for recognizing unique circumstances and are ready to adapt to changing market conditions accordingly.

It’s also important to note, the time-frame of the trade is a big factor.

With less than a week of anticipated hold time, tight stop loss, and playing for a breakout, the decision was easy to step aside as the broad market telegraphed a melt-down.

You don’t want to get into the habit of fidgeting with trades too often, this should be used selectively.

Meanwhile, our TMV had a sizable gap higher to offset the small CSX loss and then some.

tmv_9_9

Our adaptive yet highly rules based swing trading process is what we teach every day to members.

If you’re interested in learning more about how we trade, or want to receive our daily trade alerts and analysis, then check out our premium page for more info.

 

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Evan Medeiros

Evan is the founder of The Trade Risk, a financial media company that publishes research and analysis about the stock market and specializes in trading education. With 20+ years of coding experience and a B.S. in computer science, Evan brings a systematic discipline to investing in the stock market.

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