What Is A Rotation Zone And How Is It Used?

*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11am ET, as our risk management educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX there are few better to talk on the subject of risk management.

Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob’s thoughts from a recent live session. If you’d like to save your seat to watch and participate in the next session, register here.

A rotation zone, and it’s named that for an important reason, is a spot where markets tend to rotate, rotate into and then continue. If you think about what a rotation is, just the name of it, you know it's a turning, but it's not a pivot.

By rotation, what I mean is, if I were to show you an area in a chart where a chart is going higher and then it dips down and rotates back up again, that's what we're looking for in terms of a rotation zone. And, the same thing on a short trade – the trades moving lower, it rallies and then rotates back down. The zone in which that rotation occurs can be a good opportunity to get in on a move that already started.

A lot of traders want to buy low and sell high and in my opinion, buy low and sell high is one of the biggest myths in trading. I have been trading for thirty years. I have bought the low and sold the high or sold the high and bought the low four times. In my opinion, buying the low and selling the high is luck.

I want to take a section of the move. I don't expect to take the whole move and the reason is I want reliability, I want probabilities, and I want high probability trades.

That's what a rotation zone is, an area that the market may rotate into and then continue back. It's in its original trend, either way, up or down.

Traditional trend lines allow you to see breaks that matter. When I draw trend lines, I only need two points and I just continue to draw them over and over again until I get a trend line that gives me a break and then my next trend line is the target, or gives me a break, and then my next trend line is the target.

You'll see as time goes on, by drawing trend lines this way, that this trend line is probably going to line up with somewhere along these two highs before it breaks and when it breaks, you'll have a trend line as well as convenience support that matches up with that trend line. You'll have a high probability target.

That's what I do with trend lines. For a traditional trend line, you need three points to make it valid - I say you only need two because I don't need a trend line to show me the trend.

I can see the trend with my own eyes. What we're looking for as traders is trades. Not theater of the obvious. Theater of the obvious is what analysts look at.

Analysts look at Apple and they'll say - “We think Apple's in an uptrend and we just moved our target higher because it moved higher today.” That's what analysts do.

When looking at trendlines we reassess, which is what we do as traders.

If your target was reached, you’re going to go ahead and exit that trade or you’re going to tighten your stop up and then you’re going to do the next thing you’re supposed to do...

Analysts don't have to worry about that. That's why analysts are useless to most traders.

For example, an analyst could ask if the market is overvalued. Yes, it's overvalued, but so what? What does that mean to the trade you're going to take? It means nothing.

It was John Maynard Keynes that first said that the market can remain irrational longer than you can stay liquid. I'm not a Keynesian at all, but I still think that is about as perfect a description for active investors as anything else.

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