Yesterday, our position in iPath DJ Grains ($JJG) hit its protective stop, just below the August 28 "swing low," knocking us out of the trade with a small loss. We initially entered the trade because we liked the bullish "pennant" formation that was forming at multi-year highs. Despite getting stopped out of the trade yesterday, the technical trade setup still looks pretty good, and there are still favorable odds that the continuation chart pattern will follow through with a breakout to new highs. However, it now appears as though JJG will first "undercut" support of its 50-day moving average before breaking out. A quick probe below the 50-day moving average, combined with the formation of a bullish reversal candlestick, would present us with an even lower risk re-entry point than our initial entry price. If that scenario happens, we plan on re-entering the trade above the high of the reversal bar. Take a look at the daily chart below:



By entering the initial JJG trade with only partial share size, and keeping a tight stop just below support of the August 28 low, our loss in this trade was limited to only about 25% of the dollar amount of the gains in each of our two most recent two winning ETF trades ($DGP and $IBB). Losing trades are obviously an unavoidable part of the business of trading, but they are absolutely nothing to be concerned with as long as you follow a disciplined trading system that enables your winning trades to typically be at least 2 to 3 times the size of your average losing trades (2 to 1 reward-risk ratio). If JJG provides us with the re-entry scenario discussed above, we will have an even more clearly defined stop price to work with. Further, the odds of the trade working in our favor would be higher due to the "shakeout" price action below the 50-day MA.

The ProShares Ultra Russell 2000 Index ($UWM) is the only other open ETF position currently in our model portfolio. It has been holding up pretty well the past two days, but we are raising the stop price going into today's session because a break below the three-day low could lead to a swift retracement down to its 20-day exponential moving average. This is because, as shown on the chart below, the Russell 2000 (and UWM) is now testing pivotal resistance of its 52-week high from March of 2012. With our new stop price in UWM, we will still lock in a small gain even if the ETF hits our protective stop:

 

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.