 |
| Click To Enlarge |
|
|
April 13, 2005 Comments: One of the forum's active members, Laura, asked recently if I have contingency plans in place in case my entry ideas don't work out. And of course, if I see a secondary way to enter a market, I'll use that as a backup. And since she asked that question earlier in the week, I have had that rattling around in my head, trying to remember to show a secondary entry approach the next time I see one when diagramming out a trade to post here. And of course, like all things in life, you get what you get, not what you ask for. The trade featured today has a contingency twist in it, Laura, but not exactly what you had in mind. But I'll keep it in the back of my head as I trade and the next time I see two possible entries, I'll make sure I show my back up plan.
Note that the first chart is the sixty minute E*Mini S&P futures. It's a gorgeous Energy Coil that's gone on for TOO long. But remember this when trading in these large Energy Coils: They are ranges until proven otherwise. And they can be very stubborn. So before the market opened I was eyeing the up side test of this wonderful looking range or Energy Coil, and I was hoping for an opportunity to get short at the test of the top of the Coil. And I started drawing lines: Median Lines, Schiff Median Lines, channels, Action Reaction Lines, Trend Lines...You name it, I tried it and nothing hit the mark for a solid entry set up before the bell. I just couldn't find a thing I liked. Not on the 60 minute charts or the fifteen minute charts. Maybe I'd see something after the open, but before the open, other than a direct test of the upper boundaries of the Energy Coil and a failure there, I didn't see a thing!
Now normally, when a market hits me as offering nothing, I don't pay too much attention to it other than a quick glance at the open, in case a surprise comes along. But since we know the general areas of the opens these days [because of active electronic trading before the pit session], there's rarely a surprise. So with a few minutes left to the opening, I pulled up the E*Mini Russell chart, not really expecting to see much. And it was a chart of a different color! Take a look at what I immediately saw: |
 |
| Click To Enlarge |
|
|
| Unlike the S&Ps, the Russells hadn't yet approached their recent swing highs. In fact, they flirted with the 61.8 percent retracement area late yesterday, but failed to make any headway there on the close. And although price closed above the red down sloping Upper Median Line Parallel, the pre-market prices made it clear it wasn't likely they were going to stay up above this line, at least for the first bar of the open. And if you look closely at this chart, you can see the confluence of the pink first warning line drawn from the most active shorter time frame Median Line and the red Upper Median Line Parallel. These areas of confluence are often turning points--Even if price overshoots them just a touch. When you see those areas of confluence, don't blindly step in front of a train, but if price has already exceeded them, look for a price failure, and if it happens, there is generally a good move in the opposite direction about to unfold in front of your eyes. So mark them and watch them closely and be ready! Now, let's drop down in time frame to the fifteen minute level and see what it looks like: |
 |
| Click To Enlarge |
|
|
| Looking at the fifteen minute chart, you can see I left out the warning line [you can imagine it in your head or flip back to the 60 minute chart if you need to see it again] to keep the chart easier to read for most of you. The hesitancy of price at the 61.8 percent level is evident, and even more so if you sat there viewing this chart, knowing where the Globex session futures were trading. But I'll need price to open to find an entry set up, if indeed there is one. Let's watch the open: |
 |
| Click To Enlarge |
|
|
Price gaps open lower, just above the Upper Median Line Parallel. Before someone asks, is this first bar considered a re-test of a zoomed Upper Median Line Parallel? No, I don't consider it one. I like my re-tests to be quick and clean. And a zoom that comes fairly late in the day and doesn't get an immediate re-test doesn't work very well, at least in my experience. And if you really zero in on the last handful of bars of yesterday's action, instead of a clean zoom, you had price barely inching above the Upper Median Line Parallel, then a close quite a bit back below it, then a close back above the same Upper Median Line Parallel. I call those alternating closes, and they are generally more indicative of a market running on empty, looking for a turn.
On the open today, we get more of the same: A weak close just above the Upper Median Line Parallel, and price is still well below the swing high made late yesterday at the 61.8 percent swing retracement area. I think the most important thing to note here is that the locals in the pit had just enough strength to push price up to briefly trade at the Gap Filler Line but couldn't hold there for more than a minute or so before price turned back down: They went there looking for stops and finding none, they turned their positions around, looking for a test of the down side. Price makes a nice wider range bar lower, closing back below the Upper Median Line Parallel. And because price started above the Upper Median Line Parallel, you can think of this bar as marking a Zoom Failure [Or if you want to be "pure," you can think of this bar as being a zoom lower of the Upper Median Line Parallel...but we're splitting hairs]. In any event, it is a price failure at the Upper Median Line Parallel, at the gap higher opening and at the 61.8 percent retracement of the swing high. Put these three together, along with the failure of the S&P market to test the top of the Energy Coil it's been trading in, and I was looking for a sell entry. The most likely would be a pull back to re-test the Upper Median Line Parallel, so let's diagram that and see if the risk reward makes sense: |
 |
| Click To Enlarge |
|
|
I'm looking to sell a re-test of the red down sloping Upper Median Line Parallel, which comes in at 612.60. I have two choices for an initial stop loss: I can put it three ticks above the high of the day or I can put it three ticks above the yesterday's high, which is also above the 61.8 percent retracement of the larger swing. The high yesterday was 615.70, so that initial stop would be at 616.00, or 3.4 Russell points. To me, that seems like quite a large stop, so I drop down to look at the current high of the day. That's 613.80 and three ticks above that would be at 614.10, which would be a stop loss of 1.5 Russell points, which is more in line with my like for this trade. Why? I'm not particularly happy with the way price has danced around this Upper Median Line Parallel and the one thing I don't want to do is enter into a position and find myself sitting while price dances around it some more, in an Energy Coil, before taking off with renewed energy in the opposite direction of my entry...I decide the closer stop is more to my liking, although it does seem awful close to the action. But as I said, if this turns into a sloppy morning session, I'd rather get stopped out quick and with as little damage as possible. I'm always trying to play "What if..."
The initial profit target is a test of the lower time frame Upper Median Line Parallel, which is colored in a kind of "hot pink" here. Why do I think this set of lines is still in play? Go back to the 60 minute chart of the E*Mini Russell futures at the top of the page and look again at how price was contained by this Median Line set. And the failure this morning is coming right at the intersection of the first warning line of the Median Line set and the longer term Upper Median Line Parallel [if this indeed turns out to be a price failure to the down side]. In my opinion, this Median Line set still reflects price's frequencies and will project where price should run out of down side energy. Using that as my guide, I get a profit target of 605, and that would give me a risk reward above 7, which is quite nice. The other initial stop would give us an acceptable 2.1, but I don't feel like risking over 3 Russell points on this trade! So I'll choose the closer initial stop loss and take my chances that the failure is real, even though the stop is a tad close to the noise for my comfort.
I call my broker and enter an order to sell E*Mini Russells at a limit of 612.60, which is where price should intersect with the Upper Median Line Parallel. I then also enter my initial stop loss order, at 614.10, three ticks above the day's high. And remember, I am able both of these sell orders into the market at the same time because price is currently trading below both of my orders, so by definition, price has to move through my limit sell order, getting me short, before it can get to my stop loss order at 614.10. So I put my safety net stop loss order into the market at the same time I place my limit entry order and that limits my risk as much as possible. Let's see what price gives us now: |
 |
| Click To Enlarge |
|
|
Price makes quite a pull back higher, almost testing the high of the day while getting me short at our level of 612.60! For a brief moment, it looks like I may get stopped out right after I get filled on my limit sell entry order, but then price runs out of energy and trades lower as fast as it went up, closing near the low of the bar that got me short! That's the sort of price failure bar I like to see when entering a short entry, in case any of you wondered. I like to see price "stretch" itself, expending its energy, and then falling "back to earth" once the push is over.
Once I see my price print on the screen, I check to see that I was filled on my limit sell order and then that my broker is working my initial stop loss order. Once he confirms both, I give him my profit order at 605 and I make it "OCO," meaning, One Cancels the Other, so that if one of the orders is filled, the other is immediately cancelled. |
 |
| Click To Enlarge |
|
|
| Price moves lower for the next two bars, and there's little to do except watch for opportunities to further limit my risk or to lock in some potential profits. But neither options are available yet, so I watch patiently while price unfolds. The next bar has a narrower range and is an inside higher bar, meaning it's high was lower than the prior bar's high and its low was higher than the prior bar's low. I'll watch the next few bars carefully, to see if an Energy Coil is forming. |
 |
| Click To Enlarge |
|
|
| The next bar climbs higher, opening on its lows and ending on its highs. But that climb higher is erased immediately by a "mirror" bar that looks like the reverse of the previous bar: It's about the same size in range, it opened on its highs and closed on its lows. And these near-twin bars left a nice double top. The next bar trades and closes lower, but it does so in a very narrow range. I am still wary an Energy Coil is forming and when I see the small range bar close, I decide it's time to snug my stops closer. I am eyeing the double tops and consider putting my stop profit order three ticks above the double tops, but instead decide to move the stop to break even, since that would take a move above both the double tops and the Upper Median Line Parallel to stop me out. I call my broker and cancel my initial stop and replace it with a new stop order at break even, 612.60. |
 |
| Click To Enlarge |
|
|
Price does form an Energy Coil and for the next four bars, price trades in this narrow range, re-storing energy.I've already prepared for the possibility that it may shoot out of this Energy Coil to the upside by moving my initial stop loss to a break even stop order, so I don't have to worry as I watch and wait for price to make its move out of the Energy Coil once it has re-charged. It finally does break out, to the down side, with a wide range bar that makes nice new lows and closes in the lower third of its range. The next bar also makes a new low, but is another narrow range bar, so I again play, "What if..." and wonder if price will pause again, forming another Energy Coil before moving on again.
As this last bar closes, I have roughly six E*Mini Russell points in potential profits sitting in this trade and I am approaching my profit target quickly. My first thought is to snug my stop loss order closer again to the action, and I do so by moving my break even stop down to three ticks above the swing high formed as the top of the just-finished Energy Coil, at 610.50. Then I recalculate my profit target and see that price should intersect with the Upper Median Line Parallel at 604 now, so I also adjust my profit order accordingly. Now I'll just have to see what price does next. |
 |
| Click To Enlarge |
|
|
Well, we're right back in an Energy Coil! Price is just moving lower in a stop and go pattern, spending a little energy and then stopping and re-storing that spent energy before moving on.After price makes five similarly sized bars within the Energy Coil, the last one peeks below the bottom of the Energy Coil, but still closes back within the Energy Coil. I am a little leery again of price spiking back higher, and being so close to my profit target, I am reluctant to give much of the potential profits I have sitting on the table back to the markets. As this last bar closes, I snug my stop profit order to three ticks above the high of the current Energy Coil, which means I am now working a stop profit order of 607.10. A move that stops me out will have broken out of the Energy Coil and also taken out the high of the small bar made just prior to the Energy Coil. If price comes that far above the Energy Coil, I think it may find some up side momentum and I'd rather book my profits. Even if I get profit stopped out here, I'll have made 5 1/2 E*Mini Russell points, which isn't a bad day's work.
I then recalculate my profit order and move it to 603, which is where price would intersect with the Upper Median Line Parallel. Now I just have to wait and see how this Energy Coil resolves: |
 |
| Click To Enlarge |
|
|
The next two bars each make new lows and during the second bar, my profit target is met. When I see my price print, I call my broker and double check that I was indeed filled on my profit order at 603. Once that's confirmed, I double check that he cancelled my stop profit order and then I make him repeat my normal end of day mantra: "You're flat and working nothing."
I netted 9.6 Russell points on this trade per contract, which is nice by any measure. Remember that this trade idea began when I wanted to get short E*Mini S&Ps but couldn't find any trade location that looked remotely interesting to me. By switching vehicles [or markets] but staying with a U.S. stock index future, I quickly found a trade set up that I liked and that fit my risk reward requirements. There's always more than one way to skin a cat, so to speak...I hope you all find this trade example both interesting and informative. And of course, I wish you all good trading!
Act, don't Re-act! |
|