The line in the sand

Everyone does it. I used to do it too, but I stopped because I realized I looked silly a few months down the road. You’ve heard the predictions: “if this level breaks, it’s game over”, “if the 200 day breaks, it’s the end”, “we just broke the neckline of the head and shoulders pattern. This is the end of the trend”, “the 38.1966% retracement has to hold”, “when the Fed backs off, there’s no way the market can keep going up”, and on and on and on. It seems that everyone has a reason; everyone has some line in the sand, that, if crossed, will spell the end of some trend and a reliable reversal will follow. The only problem is, markets don’t work like that. have limited predictive power, in at least two significant ways: first, a really good pattern might have a 60% probability of playing out. ((I know there are studies showing much higher percentages for some patterns. I’m going to go ahead and say it–those studies are flawed, usually in one of a few ways. (Hindsight bias is the usual suspect.) Those types of edges simply do not exist in the market.)) No one, unless they either do not understand markets or are simply trying to capitalize on sensationalism, knows what will happen with reliability. We do know what will happen within the bounds of probability, and that is powerful. Second, patterns have a limited time to influence markets. Some retracement breaking down might lead to another selloff, but, after a time, the market will absorb it and will do what it is going to do. (And, remember, over any long period of time what stocks do is to go up.)

These thoughts are especially relevant in the current environment. Let me leave you with a short note from the research report I wrote this weekend for Waverly Advisors in which I discussed the same concept in a little more depth. One step ahead, that’s all we can do, and it’s all we need to do:

First, this is an exceptionally uncertain time in markets. This is important to remember, at a time when many technicians and analysts are pointing to theoretical “lines in the sand” for markets. For instance, you will often hear that if this line or this level is broken it is the end, for these levels “have to hold”. Even in common media usage, arbitrary benchmarks, percentage declines from peaks, are used to define pullbacks, corrections, and to label market movements. …[but]none of these things are…significant.


There are no magical lines in the market, no levels from which markets cannot rally. Personally, I know this because at earlier times in my career I would make the same mistake that many of these technicians make—saying that if something broke a level you “couldn’t be long” and “it was the end” for whatever trend was in place. Careful review, months and years later, showed that the patterns I identified had often played out, but the potential they had to shape market action was naturally limited.


For instance, the lows the stock market had established over the last two weeks “should have held” Friday. In fact, if the market was to have much of a chance of a quick rally, there “should have been” strong buying following Wednesday’s rally. This did not develop. Now, we are seeing many dire predictions of a coming crash, but we need to be rational and step away from the edge… In the bigger picture, this is all quite likely a healthy pullback. Keep everything in perspective.



Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 7 Comments

  1. Tomas Simpliciy

    Dear Adam,
    thanks again for your blog, book and free course, which I enjoy to follow,
    being truly grateful for what you share.
    Writing a really good pattern might have a 60% probability, do you mean

    at win/loss ratio 1:1 ?
    This would imply an expectancy value of 0.20 Risk Units per trade is best
    it can get?
    Greetings from Spain
    Tomas Simplicity

    1. Adam Grimes

      hi tomas,
      i wouldn’t necessarily express it as an E() value, but i think you’re broadly on track. in actual trading, may be able to do better (or a lot worse lol) at times, but i think you’ve set a reasonable expectation, at least as a starting point.

  2. Ashton Maggs

    Hi Adam, a little off topic, but given we work (as you said in this post) within the realms of probability in trading (and that’s important to understand), is there really anything wrong with saying trading is like gambling? I get a sense that practitioners don’t like this comparison. A ‘card counter’ in Black Jack knows losses are part of the game, and I feel the sooner traders know that losses are part and parcel of trading (a cost of doing business if you will) the better – and that’s why the analogy ‘may’ ground people and be helpful. For anyone out there, there is a great book by Nicholas Darvas called ‘Wall Street: The Other Las Vegas’ – an enjoyable read!

    1. Adam Grimes

      In my opinion, trading is a lot like gambling, but intelligent gambling. Gambling gets a bad reputation because of the stories of addiction and the casinos that exist to slowly bleed money out of the public. If you can imagine a gambler who knows the odds and only plays when they are in his favor–that’s exactly what a trader does for a living.

      I have a post in the drafts on this very topic.

      Interesting aside–I hate to gamble. Going to a casino drives me absolutely crazy because I can literally feel the odds are against me with every roll of the wheel or dice or whatever. I know people who are well aware of this and still enjoy the experience, but it’s just not how I’m wired.

  3. Ashton Maggs

    Thanks Adam. Sorry, ‘in the drafts’? A post coming up?

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