So first the disclaimer – I am actually long the Dow. As per the chart below my system generated a signal where the purple arrow is an I entered on a contingent order a little higher than that. This all occurred whilst I was asleep a few days ago.
When the system generated the signal I perceived two possible points of failure. The first at around 13,300- this had proved problematic in the past with traders unwilling to move prices higher. The second is the obvious failure at around the 13,650 level.
In my opinion the second point of possible failure is not really an issue since it is some 400 points away from my entry. Failure at this level would still leave the trade with a little something in it. However, failure at the first point would leave me with at best breakeven. This raises the question as to why to take it if I considered this level a juncture at which I might encounter some difficulty. The glib answer would be because the system said to but that would only be part of the story. I regard points of possible failure as very positive in that they tell me very quickly whether I am right or wrong – there is no need to hang around waiting for something to happen. Price either moves higher in which point I can add to the position or it fails and proves my initial judgement to be incorrect and I can move onto the next trade.