Monday, June 14, 2010

Its all about risk-reward ratio

Let me start this post by taking a moment to gloat my dear readers. From yesterday's post:

"In my opinion, selling into strength is the right strategy here, especially in light of the approaching MA(200) and McClellan Oscillator levels."

Now that that's out of the way, let's continue....

The bulls got rejected at MA(200) yet again. Nothing surprising here. I still believe selling into strength is the right strategy here. Why? Trading is all about managing the risk/reward ratio dear readers. You can make money either by reducing your risk or increasing the reward (which is almost always accompanied by increasing the risk). I prefer to reduce the risk. Looking at the chart above, this is what I see:

Resistance: 1108
Support: 1040
Present: 1089

As you can see from the above, the risk/reward ratio is clearly does not justify being overly long here. Now, you might ask, what if the market continue to go higher and break the resistance? It very well might dear readers, it very well might. But then who is stopping you from entering the sold positions again. Like I said before, its all about the potential reward justifying the risk. Personally speaking, I see the markets entering into a phase of consolidation right here. And from there on, the market goes .........

Take care and good luck!

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