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What are the lessons derived from this example?
First, the correspondence between technical values and actual prices is weak. And as we stated in the beginning, it’s not possible to base our trade timing on a price and an indicator at the same time. Second, technical indicators have a tendency to surprise, and how much a trader relies on them will depend on both his risk tolerance and trading preferences. Lastly, technical divergences, while useful as indicators, can also be dangerous when they occur at the time when we are willing to realize a profit.So what is the use of technical analysis in timing our trades? Most importantly, how are we going to ensure that we don’t suffer great losses when divergences on the indicators appear and invalidate our strategy, and blur our power of foresight?The potential of the divergence/convergence phenomenon for creating entry points has been examined extensively by the trader community, but its tendency to complicate the exit point has not received much attention. But it is just one of the many aspects of trade timing that is complicated by the unexpected inconsistencies which appear between price and everything else. So if we had the choice, we would prefer to exclude price from all the calculations made in order to reduce the degree of uncertainty and chaos from our trades. Unfortunately that is not possible, as price is the only determinant of profit and loss in our trades.In trade timing, the trader has to take some risk. The best way of taking the risk and avoiding excessive losses is using a layered defense line, so to speak, against market fluctuations and adverse movements and we discussed how to do this in our article on stop loss orders. The best way of taking the risk and maximizing our profits is the subject of entry timing, and the best way of doing so is using an attack line that is also layered. What do we mean by that?In ancient warfare, it was well-understood that the commander must keep some of his forces fresh and uncommitted to exploit the opportunities and crises that arise during the course of a battle. For instance, if the commander had run out of cavalry reserves when the enemy launched a major charge against one of his flanks, he might have found himself in an extremely unpleasant situation. Similarly, if he had no rested and ready troops to mount a charge at the time his opponent demonstrated signs of exhaustion, a major opportunity would have been lost.The layered attack technique of the trader aims to utilize the same principle with the purpose of not running out of capital at the crucial moment. In essence we want to make sure that we commit our assets (that is our capital) in a layered, ****ual manner for the dual purpose of eliminating the problems caused by faulty timing, and also outlasting the periods associated with greatest volatility. By opening a position with only a small portion of our capital, we ensure that the initial risk taken is small. By adding to it ****ually, we make sure that our rising profits are riding a trend that has the potential to last long. Finally, by committing our capital when the trend shows signs of weakness, we build up our own confidence, while controlling our risk properly by placing our stop-loss orders on a price level that may bring profits instead of losses.To sum it up, the golden rule of trade timing is to keep it small, and to avoid timing by entering a position ****ually. Since it is not possible to know anything about the markets with certainty, we will seek to have our scenario confirmed by market action through ****ual, small positions that are built up in time. This scheme will eliminate the complicated issues associated with trade timing, while allowing us great comfort while entering and exiting trades.
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