Today, we wanted to post a question from one of our Maverick Traders and the response from the original Maverick himself, our Head Trader Robb Reinhold.*
From: Steve K.
Subject: Conflict
Robb, hope I'm not bugging you too much, but I respect your experience and talent. I have traded for years as you know, but I'm conflicted on a trade setup that has worked for me and want to run it by you. I have always been a trend follower, but use Fibonacci retracements to add to a winner or enter if missed the initial breakout. I also used Fibonacci extensions to take profit on a 50% or 61.8% gain.
Can I incorporate this in my overall trading plan as a condition for the passive trading portion? I usually wait for a 1 to 2 day confirmation before entering, but sometimes the number hits right on the money and I buy or sell with a tight stop. If I get stopped out, then I will reenter with follow through. Some of my best trades have come off the Fibonacci retracements.
Your thoughts?
Regards,
Steve
-----Reply Message-----
Hi Steve,
Thanks for the email and don't ever worry about "bugging" me. I have shifted my responsibilities over the years to try to spend as much time as possible directly with our traders and less on administrative stuff.
I've literally read hundreds of books on technical analysis and, after all my years of trading, I don't think technical analysis is all that important. In fact, overdoing it can actually be quite counterproductive for a trader.
Now, don't get me wrong since I only use charts for trade entry decisions. What I'm saying is that whatever system, indicator, line, candlestick, etc., that you use, you will end up with a bell curve shaped distribution of trades where most trades will be mildly good/bad (68%), some great/poor (27%), and your outliers that are absolutely spectacular or devastating (5%).If you followed your Fibonacci retracement trading system 1,000 times, then you would still end up with a bell curve distributions of results. So, I think you should use that system/setup if you like it, but understand that it is not the "Holy Grail" of trading. I say this to you as I have been convinced in the past that I had found the Holy Grail in a technical setup only to find out it didn't work that well in other/different market environments.
To me, charting is simply the mechanism to quantify your actions and eliminate the emotional, impulsive decisions that hurt trading results. Yes, there are some things that you can do technically to improve your bell curve distribution (Win/Loss %, for example) like trading with the trend, entering a breakout/breakdown points, etc. However, in the end, even these things will deliver some terrible trades.
So, without spot-on position management, position sizing and risk management, the technical setup really doesn't even matter since every trader will eventually pick that disaster trade or hit a statistically guaranteed losing streak – which puts them out of the game. Only once a trader has spot-on position management, position sizing and risk management do the intricacies of chart reading and things like 61.8% Fibonacci pullbacks matter at all.
Hence, I am for any strategy/setup that is well thought out, tested and based on time-tested principles (trend following, etc.) as long as there is a strong position management and risk management strategy behind it. Only then can you beat the statistics of the bell curve.
Thanks,
Robb
* NOTE: Some original wording has been slightly modified for legibility.
