Ask Colin

Read your article Education: Becoming a Disciplined Trader on the Shares magazine web site. Interesting system, however doesn't this approach to wait until the price has retraced to the MA ignore money management i.e. the price could have hit a stop-loss prior to rebounding back to the MA? Also, this approach implies that your price is going to improve (i.e. we're predicting the future), whereas all technical traders don't try to predict the future, they use the charts to tell them how the market is acting now.

Read your article Education: Becoming a Disciplined Trader on the Shares magazine web site. Interesting system, however doesn't this approach to wait until the price has retraced to the MA ignore money management i.e. the price could have hit a stop-loss prior to rebounding back to the MA? Also, this approach implies that your price is going to improve (i.e. we're predicting the future), whereas all technical traders don't try to predict the future, they use the charts to tell them how the market is acting now.

Your first question seems to be confusing a few issues or concepts. Retracement to a moving average is normal in a good trend. It may have hit a stop, but I would argue that such a stop was probably too close, since if the moving average is rising and intact, the trend is still in place. Money management is about position size. It uses the stop loss as an input to the calculation, but trading the moving average is in no way ignoring it.

Basically, what we are saying with the moving average is that it represents the consensus of value. When prices race away from it, they are driven by fear and greed. The best place to buy is near the moving average when prices are not at an extreme. The moving average must be rising and the price above it or not too far below it. In such a situation, the expectation is that the trend will reassert itself.

I do not think we are predicting the future. What we are saying is that the market is trending and price is at a reasonable level. There is no guarantee the trend will continue, but the probabilities favour it. Our stop loss will look after the failure situations. Saying that a market is trending and trading the trend is not prediction the way I see it, which is that price will reach a certain level at such and such a time. Trading a trend is just trading the condition of the market.

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