Trade Ahead of the Crowd

Most traders wait for confirmation signals before entering the market, long or short, but that's a risky strategy in a modern environment where whipsaws and fakeouts are the rule of the day. Learning to anticipate price movement gets us into the action much earlier than our competition, and we can then use the reactionary crowd to our advantage.

Of course, this strategy sounds easier than it is in real-time practice, because we're social creatures looking for other warm bodies before we assume risk. In other words, most of us don't feel secure entering the market until the time and sales ticker, the level II screen, and a fast-moving stock tell us the coast is clear.

What do I mean by confirmation? Market players get fixated on the charts, waiting to see how everyone else reacts at key price points before they're willing to assume risk. However, it's often too late to act by the time they observe the movement and volume that confirms the breakout or breakdown they want to trade.

On the flip side, anticipation presents traders with lower-risk opportunities than buying a new high, or selling a new low. Simply stated, an anticipatory strategy means acting without waiting for the actions of other traders. It's a price-based approach that requires a strong stomach because it feels like shooting in the dark, especially during the early stages of the new trend.

Realistically, early entry doesn't always make money. In fact, it can even trigger more frequent losses than reactionary market strategies. However, average loss size will be considerably smaller as long as tight stop losses are used for new positions. The flip side is that multiple shots can be taken at promising patterns until the trade finally "sticks" and moves to a substantial profit.

This works especially well with patterns that look great but show few obvious entry points. The trader addresses this ambiguity with a campaign that's willing to take a series of small losses before giving up and moving on to the next pattern. The variable -- i.e., number of losses -- is defined by the maximum drawdown for a single position forecast in the broader trading plan.