Why All Time Highs Can Still Be a Rational Market, Plus the Risk Rule Most Traders Ignore

*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11:15am 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.




Every time I sit down to do one of these pieces, it feels like the market is printing another all time high. That can sound like a joke, but it is also a useful reminder: trends can persist far longer than most traders expect, especially when the tape has structural support behind it.

The real question is not “how can it still be going up?” The better question is: what evidence matters most right now, and how do I build a trade process that is not dependent on being emotionally right in the moment?

When the broad market is pushing highs, I generally see two forces that can be true at the same time:

• Valuation risk is real. One common long horizon valuation gauge, the cyclically adjusted price to earnings ratio (often called CAPE), can get to levels that historically signal “expensive.” When it is elevated, it raises the odds that forward returns are lower than average over a long window.
• But price and seasonality can still favor upside. There are periods where price behavior and historical tendencies argue for continued strength. A simple example is when a historically weak month finishes positive. Over long data sets, that can improve the odds of positive forward performance over the next several months.

Here is the key: conflicting signals do not mean you must predict the future. They mean you should tighten your process.

What I do with conflicting signals is simple:

• I accept that macro and valuation can influence the “wind at my back,” but they do not give me timing.
• I let price structure and risk rules decide whether I am involved and how much.

If you believe valuations are stretched, there are only a few ways to express that responsibly as a trader:

• Reduce position size. Same setup, smaller exposure.
• Demand cleaner entries. Do not chase.
• Use clear invalidation. Know where the trade is wrong before you enter.
• Be quicker to take profits. If your process includes scaling, use it.

Notice what is not on that list: guessing the day the market “should” fall. That word, “should,” is poison for traders.

If you take nothing else from this article, take this:

I prefer stops based on the closing price, not an intraday print.

That does not mean intraday action is irrelevant. It means the close tends to carry more information than a momentary spike.

Why?

A candle includes open, high, low, and close. But the close is where the market “agrees” on value at the end of the session. Intraday lows can be panic, liquidity gaps, or short term pressure that disappears by the bell.

“Stop hunting” is not a useful framework

A lot of traders blame losses on “stop hunting,” as if there is a coordinated effort to take their stops. In my experience, most of what people call stop hunting is simply:

• thin liquidity at certain times,
• volatility expanding and contracting,
• and traders placing stops at obvious levels.

The takeaway is not to complain about the market. The takeaway is to build stops that reflect meaningful invalidation, not emotional discomfort.

Here is the kind of situation that shows up constantly:

• A large, widely followed technology company triggers a long entry based on a defined close above a specific level.
• Price later tags the stop level intraday.
• Traders who use intraday stops get taken out.
• The market closes back above the stop level, and the trade proceeds to hit multiple upside targets.

That is not magic. It is structure.

If your rule is “exit if it closes below,” you stay in the trade unless the market proves you wrong at the only time that matters for many swing strategies: the close.

The trade management principle behind it

I do not use a single blanket approach like “always trail tight” or “always give it room.” Instead, I anchor everything to two questions:

• Where is the trade invalidated? Not tested. Invalidated.
• Can I size the position so I can tolerate that invalidation level? If the stop is far away, the size comes down.

This is where most traders break their process. They want the same size on every trade, even when the chart is demanding a wider stop. That is backwards.

Let’s talk about a common pattern category: double bottoms and double tops.

I treat them with two separate concepts:

• Confirmation: a trade above (or below) the key level that proves the pattern is real.
• Trigger: a close above (or below) that level that turns it into something I am willing to act on with size.

If you jump in early, you may get a better price, but you usually pay for it in consistency.

Why “getting in early” often backfires

When you enter before the trigger, the win rate tends to drop materially in many back tests because:

• you get chopped up by partial patterns that never complete,
• you absorb more gaps against you,
• and you increase the number of “small mistakes” that compound over time.

Traders often argue: “Yes, but my reward to risk is better if I enter early.”

Sometimes. But here is the problem:

• Early entries can produce outlier losses, especially when gaps are involved.
• Outlier losses can do disproportionate damage to an account, especially if you are compounding size.

If you care about longevity, you care about avoiding the tails.

There is one “hack” that can make sense on some intraday structures, especially on 15 minute or 30 minute charts:

• Enter on the break (confirmation),
• but if the market fails to close above the trigger level, exit quickly.

That approach often creates:

• more small losses,
• but better average entry price on the winners.

It is not free money. It is a trade-off. The point is to keep the rules objective.

Here is another piece traders miss: targets are not equally reliable in all conditions.

If an index already made a meaningful move before your pattern “officially” sets up, sellers may have exhausted themselves. That does not mean it cannot go lower. It means the classic measured move targets become less probable.

In other words, if a large-cap growth index prints what looks like a double top but has already sold off significantly before the pattern is fully actionable, a lot of the “fuel” for the measured move may already be spent.

My rule of thumb

• The more the move has already traveled before the pattern triggers, the less I trust the full measured move.
• I shift from “pattern target certainty” to “structure and momentum management.”

This is also why I like the following principle:

• Stops should be hard to hit.
• Targets should be easy to hit.

Traders often do the opposite. They set tight stops that are easy to hit and targets that require perfection.

If the market is at all time highs and valuation measures look stretched, you do not need a prediction. You need a process.

Here is the process logic I rely on:

• Do not trade the narrative. Trade the structure.
• Use closing prices for swing stop logic when your system is built on daily closes.
• Separate confirmation from trigger in classic patterns.
• Respect that early entries tend to reduce win rate and increase tail risk.
• Adjust target expectations when a big portion of the move has already happened.
• Size your positions so you can actually follow the stop rule you claim to use.

That last bullet point is the difference between traders who survive and traders who constantly restart.

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