Trading plans are used to define selection, entry, holding and exit criteria.
So often traders close out their positions for reasons other than its continued profitability.
For example: Day traders are mindful of the risk of holding onto open over-night positions. Gapping of price when the local market is closed can work for or against you; but if contrary, there is no opportunity for a stop loss exit to limit loss until too late. Hence many trades are closed out prior to market closure.
In striving for larger profits we tend to adopt longer time frames and to accept the risks of adverse market movement when our market is closed.
This risk may be worth taking if we can ride a sustained Impulsive market move in the predicted direction.
I need to explain that share price moves are not strictly random. In fact there is constantly a directional movement of price evident on charts in not just a single but usually in multiple time frames:
- A primary movement labelled Impulsive, which is proactive in response to news releases and market sentiment
- A secondary Corrective or reactive move when market participants respond to the impulsive change in price itself. Market sentiment may also have moderated in the face of a more considered appraisal of the trading equation.
These moves are in opposite directions, and may cancel out each other.
In an uptrend pattern, the impulsive move is positive, and the reactive correction less than the range of the initial move.
In a downtrend the primary impulsive move is negative, and the secondary corrective movement retraces only part of the impulsive range.
Knowing this raises the possibility of quitting a trade at the end of the Impulsive move, and perhaps re-entering after the Corrective response is exhausted.
Statistically, price will usually retrace between one-third and two-thirds the range of the Impulsive move.
We can then be on the lookout for evidence of reversal of the Corrective move, to then exploit the next Impulsive thrust.
The use of both Gann retracement and Fibonacci numbers can be helpful in deciding when to act to achieve this.