One of the biggest hurdles for a trader to overcome is that of conviction and certainty. It is so easy to second guess a trade if you lack confidence and conviction. The reason many traders lack conviction is that they are uncertain of action points. Let's take a look at the Biotechnology Index (BTK.X) and Amgen (AMGN) and see if my trade on PremierMarkets.com makes any sense as it relates to a short/put play for Amgen.
Biotechnology Index - last eight months
Purely based on risk/reward, I'm thinking the BTK.X has bullish traders second guessing their long positions have a 20% rally from recent lows. Using the retracement bracket I can then use a break above 481 and 50% retracement to tell me that my analysis is wrong. I can use a trade at 403 to tell me my analysis is correct and give me the opportunity to reward myself by taking a profit from a bearish trade.
Amgen Chart - last eight months
Yesterday, I added Amgen (NASDAQ:AMGN) to a short position on PremierMarkets.com at $59.12. Our stop for the trade is just above the 61.8% retracement bracket at $62.18. Notice the correlation if you will between the levels and how it gives us a cut and dried stopping point as it relates to the BTK.X. Today, shares of AMGN have traded inside yesterday's high and low for the session. Today is what I call an inside day as it relates to current trading. If the stock continues to trade inside yesterday's range of $62-$58.63 we can then use a break above or below today's high/low as a sign of strength or weakness.