A Complete Guide to the Futures Market, 2nd Edition

CHAPTER 12

Midtrend Entry and Pyramiding

Nobody can catch all the fluctuations.

—Edwin Lefèvre

For many reasons, you may find yourself considering whether to enter a new position after the market has already made a substantial price move. Examples include: (1) you were not previously following the market; (2) in an effort to get a better price, you futilely waited for a price correction that never developed; (3) you were previously skeptical about the sustainability of the trend, but have now changed your opinion.

Faced with such a situation, many traders will be extremely reluctant to trade the market. This attitude can be easily explained in psychological terms. The act of entering a new position after a trend is already well underway in a sense represents an admission of failure. Even if the trade is profitable, traders know their gains would have been much greater if they had acted earlier. Thus, even when you have a strong sense of probable market direction, you might be tempted to think: “I've missed so much of the move, why bother?”

As an example, consider chart-oriented traders examining the coffee market in mid-February 2014 (see Figure 12.1) after not having participated in the sharp price advance prior to that time. Such traders would have noted the market had broken out above the resistance level defined by the January 2014 and October 2013 highs, with prices remaining in new high ground for two weeks—a very bullish chart configuration. In addition, prices had ...