Why should you Double Down?
The only way to be successful using this 9:45AM game plan is to "double down". Traders must have enough capital to put on 3 postions, or in other words divide their capital into thirds. The first third is to initiate a position. The Second third is used to average down or double down and the last third is to give both positions a little room before they need to be closed. By doubling down, the trader is attempting to close the losing position at break even. That way the winning trades become cumulative. For example, if a trader buys the SP500 at 1000 and it drops to 990 they lose 10 points. But if the trader buys again at 990, the SP500 only had to go to 995 for the trader to break even. So if the market rises to 998, the trader now has converted a loss into a gain. If the market goes to 994 and then back down. The trader takes the loss. But by "doubling down", the trader has improved his odds of success.
And if you have been following the market for awhile intraday, you'll see that prices bounce up and down 5 points very often. The next day the trader buys @ 996 and the market this time goes up to 1004. The trader is in profits and now has 2/3 of his capital remaining. The profit gained gets added to his previous winnings and his account grows. Of course there are days in which the trader loses. But theoretically it is now 2 in 10 versus 1 out of 2. If the trader manages his money wisely, the losses will not wipe out the previous 4 winning traders (4 wins, 4 break-evens) and his account grows.
If you have been following this closely, then you'll also realize that the trader only made money on 4 out of 10 trades. These aren't good odds, but what makes the trader successful is his money management skills. Remember, nobody can predict the market. Sure, you can have "runs", or periods when you're "hot, but if you plan on doing this for 40 years, the odds will catch up to you. That's why you occasionally read about huge disasters. Every once in awhile some major institution blows itself up because they got overly confident in their ability to "stay in the zone". But the markets, always take what they give, so the question is can you figure out a way to keep it? So ask yourself, why is it that there are so many newsletters out there? The seemingly successful traders are hedging against future losses by selling their opinions.
If you can follow this then it isn't a big stretch to explain why Fibonacci ratios work. Fibonacci ratios are nearly close to 1/3s and 1/2. So hopefully you can see how prices are affected by how many traders are in profits and how many are losing. The first wave down will get traders to "double down" and sometimes traders will "triple down", but then the bounce comes. Depending upon the strength of the bounce (whether they fought to break even or if it came easily), they will unload their position to re-establish a new position. This gives rise to lower highs in declines and higher lows when prices rise. Hopefully, this simple example, helps you to connect the various concepts of technical analysis and helps you to understand why fibonacci ratios predetermine support and resistance levels.
Lastly, here's some food for thought. If you consider that using the previous day's market direction is only 51% effective in predicting tomorrow's direction; and if using the 9:45AM or 9:55AM price is only right 52% of the time; and that flipping a coin is 50%, then perhaps short term trading should be viewed as a game of chance. Instead of spending alot of time on analyzing prices in search of tops and bottoms, or "being right", what if you were to consider trading as a game rather than investing (searching for unrealized value), then all that matters is your skill at money management. Of course, being lucky or having good intutitions will be advantagous, but even if you aren't lucky, you can still make money if you apply solid rules to managing your money.
Trading to win is alot different than making money. Trading to win is about "being right" and getting paid for it, while losing is demoralizing besides ending up with less money. Trading to win is 1:1. For every win there is a loss, and trying to beat the odds of winning 8, 9, or 10 out every 10 trades, which is impossible to sustain. It's possible for short runs, but impossible for the long haul, like winining every trade for 20 years.
But if you were to change your focus from "being right" to making money, then you could convert a losing trade into a break even trade and be OK with it. You could accept being wrong without it affecting your psyche and draining you emotionally. If you adopted the making money strategy, you could still make money while only having 4 winning trades out of 10 (4 wins, 4 break-even, 2 losses). If you were to adopt the making money strategy, you could easily wake each day and "buy" the market because of its inherent upward bias. You could easily "buy" the market when it's 10 points lower than the previous close. You could easily create a simple rule that makes your life easy and simiple. Just note how emotionally draining it is in trying to be "right". Just note how much energy it takes to analyze and formulate a daily trading plan to be "right".
Think about this, if in your line of work you had to constantly re-evaluate every decision each day. You wouldn't be able to make any money that way and you can't when it comes to trading. Trading viewed in the context of a business has to be mechanized just like any other business. In business you attempt to duplicate each step of the process with precision and automation. For example, how can McDonald's pump out 10 Million burgers a day. For one, it can't take alot of thinking. As a matter of fact, they have evolved to remove all thought from the process. So if you were apply this to trading, and make it less personal, you could begin to more make money by focusing on developing your money management skills rather than on your analytical skills.
Let's look at July 2004. If you were a guru and you sold the SP500 7/1/04 @1140 and bought @1080 on 7/26/04 and sold @1100 on 8/2/03. You could have made 80 points in 2 trades. That's $4,000 if you traded one contract of the E-mini contract (80 pts. x$50) and it would represent a 100% gain against the $4,000 required to trade one contract. But if you bought 7/1/04 and held it, rather than selling it; you're still losing. So you're negative for the month.
However, if you had enough capital to trade 4 futures contracts and blindly bought every open and every +5 or -5 points until you reached +15 or -15 from the open, you would have to make 37 trades (transaction fee @$10 each). You would have made 115 points and lost 70 points which nets you 45 points. 45 points times $50 per point equals $2,250. Now substract the $370 in fees and you still made money: $1,880. Now, this isn't great compared to the 80 points, but remember you were blindly buying every day and you still made money! You had a simple plan and executed it without regard to being right. This is amazing considering you were wrong nearly every day. Now compared against the fact that had you bought on 7/1/04 and held on you would still be losing money. So $1,880 isn't bad. However, if you compare the $1,880 you could have made to the amount of money required to make it, which is $16,000, then this $1,880 represents 11.7% for just one month! Some investors are trying to make that in one year, and here you could be wrong nearly every day and still make money.
Hopefully this gives you added insight into the minds of professional traders who just don't care what the market does. They simply follow their plan and take the losses when they need to and try to break-even most days. The winning days will take care of themselves without any emotional damage.
PS - don't forget. If you can do this with one contract why not 2, 3, 4 .... etc. Now you can see the power of volume when you finally get a system that emotionally frees you to succeed. That's in a nutshell how the rich keep getting richer. They've reduced trading to become a "no-brainer". Why value invest, it's too hard?