Here comes Santa. Wed Dec 2

US markets are very near their highs again and with the Europeans playing catch up, we've rallied another 1.3% or 61 points just before midday. The peak was a rise of 75 points soon after the open.
The big reversal has passed me by, ironically. I've identified that reversals offer some great opportunities for quick gains but I'm more set up for a couple of different types which are either a simple reversal indicating trend resumption or a retracement type reversal after a long 5 wave fall. This is something different again although it's not an unusual event. The Xjo chart illustrates the different types of reversal quite well. In early October there's a bullish resumption and although it's not completely clean because the low has fallen below a couple of interim lows on the way up to the late September peak, the more significant low does look like the one on September 14 and this was not breached. In addition, it was a straightforward fall into the reversal point.
The next one comes a month later and this is after a 5 wave fall. You can always debate wave counts but it was close enough for me.
This latest reversal is a different one again. What's tough for me is that there were (using Joe Ross terms) 1-2-3 sell signals and my approach is that these will usually extend into 5 wave patterns. Therefore, rather than using a trailing stop and losing half the gains, I'd rather close out into the 5th wave. Obviously, you don't always get a 5th wave and this is a prime example.
It raises two questions for me.
Defensively, are my stops too wide. At present, I'm using the top of the last swing down so that if I was short the Xjo then only this morning would I have stopped out. There are lots of different stops I can use but I plumped for something really simple that I could stick to and that would stop me from overtrading. I do think that it generally evens out in the long term but the key point is what feels right psychologically and what is going to allow me to follow my plans. I don't want to take too big a hit that might affect my confidence but I want something close to an optimal result. My version of optimal does involve smoothing results: I know that you can backtest to get great results by pyramiding into trends and staying in them for ages but you also have months, quarters and years where you make nothing. This is only practical if you're in a big trading house or hedge fund that's set up for this style.

Elaborating on stops, another approach is that once you are in the money - by how much, you have to decide - then you move your stop to your entry point or perhaps where you would like your entry point to have been if you've had some slippage. A further wrinkle on this is that if you are well in the money on a position then you protect half your gains.

Recent trading has tentatively encouraged me to favour moving my stop to breakeven but because I usually close out a quarter to a half of my position if it has moved rapidly in my direction I don't think I need to then try to protect half of the profits. A chart of Awc persuades me of this. I'm short this still at just above 165. I bought a few early at 162, then about half from 152 to 156. The stock fell to as low as 150 so if I wanted to protect half of my gains on the balance then I'd be buying here at 158.5. However, I've actually closed out a little over half and it looks like a 4th wave correction with further weakness to go so this approach would have me doing what I don't want to do which is chasing a stock as it moves against me.Moving on to the second question, could I have gone on the offensive and seen this Xjo reversal - repeated in lots of stocks - as the opportunity it so clearly was? I'm not sure. What I think, and what made me uneasy at the time, is that the size of the reversal, the finish close to the highs and the break back into the previous trading range were all bullish signs. I need to go back and look at similar events and see if this can help me. It could work in two ways, firstly, as another emergency type stop that you take even if your actual stop isn't triggered and secondly, as a simple buy signal.

1.36 To interrupt the navel gazing...I sold out the balance of Telstra early on at 347 (v 340), bought back most of my short Onesteel at 310 (v 300) as it went through my 309 stop and just closed out the remaining half of my short Fxj position for breakeven at 166 in light of the thoughts expressed above. I haven't yet stopped out of Bsl which went through my 292 stop although it's back at 290 now.

The Bsl chart has also added more clarity to my thoughts on stops and reversals. I shorted this at 276 after missing my initial entry at 279, six bars ago. I felt that this was the start of a 3rd wave and I seemed to get confirmation of this with a good move down into Friday. Once a trend is established you shouldn't expect any retracements to overlap the previous swing. Yesterday though, Bsl traded back through 280 and clearly negated the possibility that it was only a 4th wave correction. Even if I was not using my entry (or preferred entry) as a stop, this should have been a compelling reason to stop out.

Having negated the downtrend, it then allowed the possibility that this was a buy signal although since I would have been buying at 280ish with a stop around 260, I probably wouldn't have taken it.

2.01 I'm having another look at my recent Fairfax trading to see if I can glean anything from it. This was a reversal trade which I was late into. The optimal entry would have been towards the close of the dark candlestick day which suggested a lower high might be in place. This was in mid November. I actually got in the following day at 166. Looking back, I had a consolidation and a drive down which led me to close out half at 156 and 157. I could have justified closing out all of this last Friday because I'd had a swing against me and now there was a new low (for that down move) and obviously that would have been the best option. I thought it could be a 3rd wave so I held on but the next day when the stock overlapped the 162 swing low then this possibility was negated again and, once more, there was the possibility of a reversal buy especially with Fxj coming off a higher low than November's. I failed to spot this but I have at least closed out at 166.

This is now setting up for a 1-2-3 buy signal over the next few days.

2.55 I haven't had the opportunity to do much work on these amendments to my stops apart from running my eye over a series of charts but I think that I'm going to go with this general tightening up as an interim measure.
The biggest stop tends to be at the start of a trade or when you're well in the money and can stand a big retracement without the trend being changed. I've also noticed that it's generally wise to wait a little to see if a stop trigger is genuine and not just market noise.

3.30 Out of the last third of the Ozl at 125 (v 125.75) as this is the same story as Bsl and co. I realised I could/should have closed out on Friday and had managed to pick up a few more around 120. I think it's too late to take a reversal buy and the picture is unclear because of the lower high in mid November.

4.10 Having missed my new improved cuts by quite a way, I'm not rushing into closing things out as the 60 minute charts look extended. I've bought back a few Awe at 274 (v 271), two thirds of the Bsl at 290 (v 276), a couple of Djs at 574 (v 577.5), a third of the Fmg at 430 (v 397), and a couple of Tse at 402 (v 412.5). Djs is in a choppy range though with signs of weakness, while Tse should have been stopped out of last Friday (again!) and Fmg was a cut today on the wide swing high basis but then showed no strength so it looks like a potential short tomorrow. I may as well hang on to some of the short position as it didn't make it above November's highs.
The Xjo index closed up 43 points but it sold off slowly from the open and there could be some more gap filling to come tomorrow.