It’s a H&S until it’s not

Posted on Wednesday May 11, 2016
I have been conversing regularly with one of my followers, who is really working hard to get up to speed with my strategy. I love it, he asks a ton of great questions and it even helps me to think through my strategy as it forces me to be able to explain it. No strategy should be so complicated that you can’t explain it. If it is, I would be highly skeptical. 

Around here at higherlow.com, we keep it simple. We primarily look for H&S and inverse H&S patterns. I’ve been trading a long time, and this is my bread and butter. I have a few other trades I like, but many lead into the same pattern. If you are going to learn trading, take all the indicators off your screen and just study price action.  You will learn much more from it, than you will from the location of a moving average. The only thing that matters is price. Yes it’s a cliche, but it’s true. Are we making lower highs and lower lows or are we making higher highs and “HigherLows”.  If you aren’t sure, then move on to the next chart as there is no trade. 

Anyway, we have been discussing how last week we were bearish. We have a H&S topping pattern targeting 2043.99 and so anytime we had a bounce into or below that neckline, our mindset was to sell short, until 2043.99 was either acquired, or we had reason to believe that the H&S top was under attack by the bulls and was going to fail. I can do many blog posts on what that looks like, but it never happened.

As you know, and as demonstrated by the chart below, that target was acquired. At that point we take our profits and re-evaluate. If the market goes lower from there, we consider it luck. From experience I will tell you that taking profits at the target and just moving on to the next setup is far more profitable than trying to get out at the bottom.  It takes all the emotion out of the trade. A trade basically comes down to 
1) Identify a pattern
2) Enter trade a point that offers a good risk reward
3) Let trade ride and take profits at your target or honor stop

That’s it. You decide how much you will lose up front and honor it. The key is to have a strategy or pattern that you understand. We don’t invent things, and this is a major reason that I don’t use many indicators as they tend to lead us to confirmation bias, where we see what we want. 
In reality it’s a H&S or it’s not. That is all we care about. 

Let’s dig a bit deeper into what I just said. It’s a H&S until it’s not. We Identify the pattern, and we learn how to trade it. 

I want to use facebook as an example. Now you guys all know I don’t hold through earnings. As a technical trader, that is not my edge. In fact, we are very aware of large events, like the fed on the indexes and earnings on the equities, and we stay out of the way when these events are up.
Why, because they tend to mess up the normal supply and demand dynamics that we are trading. 

As an example Facebook was a clear H&S pattern into earnings, however, earnings changed everyone’s mind.

So it was a H&S until it wasn’t. Over time as you study price action, you will learn the things that should change your mind. 

As another example: 
Back in early April, it looked as though the market wanted to top out.  However, we were able to turn the right shoulder into an inverse H&S and break the pattern.  So we always need to be on the lookout for things that could change our mind. 
That is what we do when we study price action. 

So here we are today, and yes, I want to be a seller of strength, but what if something like this happens. We must change our minds. Always remain flexible as its a H&S until it’s not. 

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2 thoughts on “It’s a H&S until it’s not

  • What strikes about the way you write and your approach to trading is that you’re very upfront about what you can do and what you can’t. You don’t claim to know everything, or that your strategy works 100% of the time. You avoid situations where you don’t have an edge. This is reflected in your writing. You go and say something like ‘it *should* do this, but if prices doesn’t confirm our position we must change it’. Most people blasting off their bearish or bullish biases are too proud to change their positions. Or if they must change it they say something like ‘oh I would have been right if it hadn’t been for X’ ie excuses.

    Another thing that strikes me about your thinking is that you write about risk reward. I don’t think I’ve read any technical trader that has remotely approached risk reward the way you do. Many people just write about how the market should top or bottom a X or Y level, but they never say anything about what happens if they’re wrong. You do.

  • Thanks Ricardo, You are correct, I try to spend my time focusing on where I have an edge. If I don’t what is the point of acting like I do? I have learned the hard way, as most do, the market decides, the best thing we can do is position ourselves in line with it. I try very hard here to articulate what I am thinking and why and I am glad the fact that I lack an ego is coming across. A gentleman just this morning guaranteed 2090 this morning when I posted some of the things I will be watching. Of course, he had no thesis, just an opinion, of which so far is wrong. He may ultimately be right, but this is the type of emotional noise that get’s people in trouble. I trade price patterns and only price patterns, if they don’t exist, I have no edge, I’m not scared to admit that. Appreciate the feedback, and keep following.

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