Imagining the Opposite – When the Sweet Spot Fails

In the First 20 Hours by Josh Kaufman, he describes 10 principles to effective learning.  #4 ‘Imagine the Opposite of What’ helps you to identify important elements that aren’t immediately obvious.  In trading, when the stakes can be very high, we want to use the same approach at the start of any trade.  As such, the sweet spot trade setup was built around what failure looks like (1:41):

Here we have a stock that had traded up off of weekly support & AbleTrend daily signal turned to buy (Stage 3 from the WYNN sweet spot case study).  We could wait for a 2nd chance entry (stage 4); we get prices pulling back to the daily support at $55.57.  When the prices react to that support & trade higher, a buy signal is indicated:

From there, prices continued up to $60.28, but failed to continue up beyond there.  We saw that as a lower high forming, below the previous high at $62.69.

The reversal here happens gradually, and prices even went higher with 2.4% open profit to start.  This is what is meant by ‘prices continuing up as a function of noise’.  The market here wasn’t really going to continue up, and by taking a long position, we would ultimately prove to be wrong about the direction of the stock.  Yet, by scaling out at roadblocks & using AbleTrend dynamic stops, the outcome could have been profitable.  Prices have since dropped nearly 14%.

By studying ‘how deep the water goes’, we are able to operate with confidence in the face of uncertainty.  Tomorrow, we’ll take this series to a close, with a return to practical application.  We’ve taken a very in depth look at imagining what can happen following a trade setup, but in practice this may not amount to more than 10 minutes a day.

Best Regards,

Jesse

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