Two Line Entry
I plan to use this forum to publicly describe my trading ideas, strategies and plans; based both on what I am personally doing (be it badly or well) and also on brilliant observations that I have read from others.
I tried scribbling notes and outlines in a notebook to myself, but the fact is I’m a slacker and the results were disappointing.
(Subliminally I knew I could get away with shoddy work if no one was looking)
Let’s see if making the same thoughts public forces me to be more exacting in how I describe the What, How and Why’s of my thinking. If I can’t make any sense of it, why the heck am I doing it? And how much damage could it do to me?
One strategy that I am very comfortable with is what I like to call a Two Line Entry.
Here’s a sample of a lucky one I had yesterday:
TWO LINE ENTRY
As RIMM started to stall during an uptrend from around $115, I felt comfortable mentally drawing a red line for a stop around at $117.25 and a green line near the previous trend low at around $115.15.
I felt confident at that instant that the odds of hitting the green line first were greater than the odds of hitting the red and stopping me out, based on how the market and RIMM itself were performing. Even if the was a literal coin toss, a 50% winner rate would still put me ahead if I properly let enough of the winners run.
So I shorted RIMM at $116.27 and the game was on!
It’s really just a mental game, firming up in my mind why I entered the trade, and more important, at what point do I cry Uncle! and look for another opportunity.
What’s the benefit for me in using Two Line Entry methodology? I find it much easier to manage risk by entering a short term position this way. The decision to stop out is a completely firm one because the decision itself was that it would hit green before red. If it hits red, I WAS WRONG!!! Game over. Whether its a mental stop, trade trigger, or a stop loss order, the game is done and I’m the loser. Like playing 21 in Vegas – there’s nothing to argue about if the dealer draws an Ace and a Queen.
Obviously to play the market by thinking this way you would prefer to find spreads where the red line is much tighter to your entry than the green. But in principle, that really does not matter. By keeping faithful to your stops, and allowing some of your winners to run, the odds of success improve significantly.
The Red line decision leaves no room for second guessing, but what happens once you hit a Green line? That’s the tricky part. I might have done just a bit better on this one if I hadn’t used a trailing stop.