Monday, July 12, 2010

Rejection Rule

Ok, we have talked about channel breakouts in our previous post and how to profit from them. Now as we constantly trade, we also constantly make improvements. Today we are going to be talking about Rejection Rule.

Rejection rule is basically an exit strategy. It helps to filter out trades that have a higher chance of being not profitable. This strategy often allows us to double our entry with the same risk.

So how and when do we apply the rejection rule? First we have to understand how the rejection rule comes about. The rejection rule is built on the principle of instant gratificaton; enter a trade and expect to win right from the start, if it struggles, it is most likely not profitable. Winning trades mostly win right from the start.

The only condition for applying the rejection rule is the 5 day condition. Only use the rejection rule if only the 55day highs have the same highs for the past 5 days prior to breakout. And the rule states that - Exit 55-20 trade on the day or 1 day after breakout if the close for the day is lower/higer than the breakout/breakdown.

For example a long position, if the day closes below the breakout level, right after a 5day same high, we know based on instant gratification rule that the trade is not instantly profitable hence we exit the trade. Remember all good trades, you expect to win right from the start.

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