Last Bar

Alright we have seen how some add ons such as the rejection rule can improve the 55-20 trade. We are going to introduce another technique, that is the Last Bar.

This Last Bar technique is very simple, and it is also based on the instant gratification rule. Ok first what is a last bar? A Last Bar is defined as the last bar that has some of the bar prior to breakout; or the last bar that has any part below the breakout level.

So how to use the last bar? This technique is a technique that can help you increase profitability. Move the stop loss to the bottom of the last bar whenever this senario arises, instead of having a stop at the 20day line. This way, your stop loss is less and you can hold a larger initial position based on our risk management basics. The Last Bar increases the profits, yet cuts the risk.

So there are a couple of exit/stop loss rules with the 55-20, which order do we follow, where do we place our stop loss or exit? Right, the order goes like this, follow the Rejection Rule first, Last Bar second, then the 20 day low.

Hope with this you will gain more confidence in trading. We have ended the technical analysis portion of our techniques, next we will look at trend analysis to further boast our profitability.

Rejection Rule

Ok, we have talked about channel breakouts in our previous post and how to profit from them. Now as we constantly trade, we also constantly make improvements. Today we are going to be talking about Rejection Rule.

Rejection rule is basically an exit strategy. It helps to filter out trades that have a higher chance of being not profitable. This strategy often allows us to double our entry with the same risk.

So how and when do we apply the rejection rule? First we have to understand how the rejection rule comes about. The rejection rule is built on the principle of instant gratificaton; enter a trade and expect to win right from the start, if it struggles, it is most likely not profitable. Winning trades mostly win right from the start.

The only condition for applying the rejection rule is the 5 day condition. Only use the rejection rule if only the 55day highs have the same highs for the past 5 days prior to breakout. And the rule states that - Exit 55-20 trade on the day or 1 day after breakout if the close for the day is lower/higer than the breakout/breakdown.

For example a long position, if the day closes below the breakout level, right after a 5day same high, we know based on instant gratification rule that the trade is not instantly profitable hence we exit the trade. Remember all good trades, you expect to win right from the start.

Risk Management

For a system to work, the psychology, discipline is very important, the most important. Next after psychology, risk management comes next. A bad risk mangaement can create stress that affects the psychology. A bad risk management can kill a perfectly good system.

In a fair game, let's say you flip a coin 1000 times and you were to bet $10 per flip on heads or tails, with a starting capital of $100, what is the amount you expect to end up with after 1000 flips? What are your chances of winning?

The answer to the above, you may think you will end up with $100 still for a fair game, no win no lose, 50%-50%. However this is not true. You will have over 90% chance that you will end up with $0, claypot.

This is simply because out of a 1000 flips, as long as you lose 10 consecutive times, $100 is gone. And out of a 1000 flips, the chances are pretty high that you might lose 10 or 20 in a roll.

This is where risk management comes in. Betting $10 per flip or 10% per flip is too high. If you apply proper risk management, and use 1% per flip, your chances to claypot is less than 1%. With the law of large numbers, in the long run, you can always expect the result you are looking at, so you have to stay in it for the long run and not go to ruin after the 10th attempt.

So the recomended strategy to use for risk anagement is the fixed fractional method. Bet a % of the total money you have in your account. This is the best method for blance between risk and rewards.

For beginners, start small, say 0.5% per position. Then as you gain experience and confidence, gradually increase to 1% or 2%.

Now with this, you can start trading without fear of ruins.