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April 22, 2005 Comments: The E*Mini Russell futures have been in a nice up trend and have basically stayed within the up sloping blue Median Line Set since the low pivot was made on April 18. Price extensively tested the top of this Median Line set, then it tested the bottom of this Median Line set and price ran out of down side energy just where the Median Line theory predicted it would: At the Lower Median Line Parallel. Then price began another orderly climb higher, again eventually testing it's "most probable" line, the Upper Median Line Parallel, which is where price closed on Thursday. Note that though it has briefly closed above and below this Median Line set, a sliding parallel drawn from the extremes of these outer closes did an admirable job catching tops and bottoms, within the boundaries of the noise of this market.
Note that I did a very general count of the pivots, the sort of count Dr. Andrews would teach. There's nothing magic about any of the pivots or how many there are; This isn't Elliott Wave theory--I'm just trying to keep track of alternating pivots. Once I can clearly count to P5, I begin anticipating that price MAY turn--and I keep that thought in the back of my mind, waiting to use it in context with the other things price is telling me. In the case of the latest run up, there is no point in showing the P0-P4 Line: It's slope was so steep, price drifted out of it to the right as time shifted price forward. Let's see how price opens: |
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Price gapped open lower, zooming below the Upper Median Line Parallel in a wide range bar that closed on its lows. This is not the type of run away zooming gap that normally comes back for a re-test, but if it does, I'll try to sell the re-test.
The next bar is a narrower range bar that tests the blue up sloping Median Line while making a new low and closes unchanged. Dr. Andrews' work tells us that one of three things will likely happen at this point:
1) Price can gap or zoom through the Median Line to the down side.
2) Price can stop at the test of the Median Line and change direction, having expended its stored downs side energy.
3) Price can consolidate after the test of the Median Line, forming an Energy Coil to re-store its expended energy.
The next bar has about the same range as the previous bar and closes higher, but price hasn't moved far from the Median Line yet. It's still unclear which of the three possible paths price will follow. Let's see what happens next: |
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| Price makes a higher high but then zooms lower, through the Median Line, and it closes below the Median Line, within the lower third of its wider range. It's not the prettiest Zoom bar I have ever seen--In general, I like them to separate themselves from the Median Line a bit more--but because price so strongly rejected the support at the Upper Median Line Parallel at the open and had already completed more than five alternating pivots, I'm willing to accept it as a valid Zoom bar. Let's see if I can lay out a trade set up to sell E*Mini Russell futures that has a decent risk reward ratio: |
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The most obvious trade entry would be to sell a re-test of the blue up sloping Median Line, which is a classic Zoom and Re-Test trade set up. The Median Line will intersect with the Median Line at 595.40 when the next bar opens, so that will be my limit order, to go short at 595.40.
Now note that to the left of my re-test area, I marked a secondary plan, which is a direct answer to a course member that asked if I ever consider secondary entry areas in case my initial entry plan doesn't unfold as I hope it will. In this case, the secondary plan would be to sell a break that is three ticks or more below the low of the Zoom bar's low, which came in at 594, so my secondary sell order would be a stop loss order to sell E*Mini Russell futures at 593.70.
My initial stop loss is simply three ticks above the 597.70 high of the Zoom bar, which makes my initial stop 598.00.
Before I calculate a risk reward ratio, I have to identify a profit target. Let me begin by answering a question that several people have asked privately in emails and our resident chef asked on the forum the other day: How do I decide where price might intersect with a Median Line or Upper/Lower Median Line when I draw these trade set up diagrams--where or how do I come up with a price? Look at the next chart, and I'll give you a brief and hopefully simple explanation: |
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| There's nothing mystical about the intersection prices I use when calculating the risk reward rations and show an initial target. I simply pick what I consider to be an "average" sized bar and then space a number of them to the right, overlapping their ranges about 30 percent, so they move in an orderly fashion down towards the Median Line or Upper/Lower Median Line I feel is the "most probable" line where price will run out of energy. In the example above, I didn't even do any calculations to determine the size of the "average" bar. Then I simply chose what looked to be a bar with an average range and then strung a handful of them together, overlapping them by 1/3 of their range as I moved them lower towards the blue up sloping Lower Median Line Parallel. It can really be that simple. You can also make it more complicated by keeping a real-time spreadsheet that shows you the size of twenty period moving average of the range of the bars [you DO NOT want average true range, because that would give you measurements that reflected the opening gaps] and then doing a similar exercise, but after doing this a few times with the more exact method, you get a feel for it and can eyeball where price will likely intersect with the Lower Median Line Parallel as accurately as if you had done it using precise averages. Now let me show you the profit target I had in the back of *MY* mind as price gapped open lower below the Upper Median Line Parallel and it became clear it was not going to re-test that Upper Median Line Parallel [all the way back above 600...]: |
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Looking at this longer-term view, you can see that the last time price intersected with the Lower Median Line Parallel, it did so at around the 586 area, and then price gapped open higher the next morning, a strong sign that price had run out of down side energy at this level. And looking further to the left of that intersection [back in time], you can see that the last time price intersected with the blue up sloping Median Line, it came in at about 586, and again, price gapped open the next morning--again showing that price had renewed up side energy at this level. So price has made strategic gaps higher once they reached the 586 level where it was in confluence, either with a Median Line or a Lower Median Line Parallel.
There isn't a Median Line or Lower Median Line Parallel at the 586 area this time to use as confluence, but there is something else that often shows us where price has likely run out of energy: A Fib projection. Here's how I found it:
1. The high at Pivot 1 is 597.00
2. The low at Pivot 2 is 585.20
3. The distance between these two, the length price travels before running out of energy, is 11.8 points.
4. I take 1.27, a very commonly found Fibonacci expansion ratio and multiply it by the distance price travelled, 11.8 points. This gave me 15 points.
5. I take the swing high of 601.30 made yesterday afternoon and subtract 15 points from it. This gives me a 1.27 Fibonacci expansion target of 586.30. And that gives me my confluence to go with the two prior times price stopped on the down side at the 586 area, only to gap open higher the following session.
Am I going to use the projection I made to the Lower median Line Parallel as an area to take profits? No. That profit target, at 590 1/2, would give me a risk reward ratio of about 1.5, and that's IF price made it to the Lower Median Line Parallel in five bars. And remember: The Lower Median Line Parallel is an up sloping line, so the intersection price rises as time moves forward: The longer it takes time to test this line, the higher that profit target would be and the lower the risk reward ratio would be. This doesn't fit my trading profile. *BUT* if you are a scalper or more active trader, this is one area you can consider taking partial profits.
Instead, I will place my profit order at the 586 confluence area I outlined above. And that gives me a risk reward ratio of roughly 3.6, assuming I am filled on the re-test and NOT the secondary sell order, which is a very solid ratio. What about the secondary stop loss entry order? It still gives me an acceptable risk reward ratio of 2.18. Let me diagram out the orders and check that they look right: |
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| The orders look correct to me, so I enter my limit sell order at 595.40, my initial stop loss order at 598 and my secondary stop loss entry order at 593.70. IF I get filled on a re-test of the Median Line, I'll have to be quick to cancel the secondary sell order [and of course, IF I first get filled on the secondary stop loss order sell entry, I'll have to quickly pull my limit sell order]. |
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| Price opens a touch lower but then moves higher quickly, making it above the Median Line and filling me on my limit sell order at 595.40 before running out of energy and turning back lower. I quickly check that I am filled on my limit sell order, getting me short, and then cancel the secondary stop loss sell entry order below the market. Before the end of this bar, price moves through the low of the zoom bar and closes below the Median Line and at its lows. So far, so good. |
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| Price forms a beautiful Energy Coil and by my count, stays within it for about fourteen bars. As the bars make a third test of the high of the Energy Coil and narrow again in range on their descent, my intuition tells me price may be about done re-storing energy and a move is coming now, likely out through the bottom of the Energy Coil. I add a new red down sloping Median Line, drawn from the 601.30 swing high made yesterday afternoon and the "width" bars of the Energy Coil. This gives me a projection of the slope, rate of decline and potential areas where price *might* run out of energy to the down side IF my intuition proves right about this down side break. I then cancel my initial stop loss order and move it down to three ticks above the 596.30 high of the bar that re-tested the Median Line and got me short--so my stop is now at 596.60. Let's see if my intuition is right: |
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| Price moves through the bottom of the Energy Coil with two wide range bars that close lower. The second of these two breaks convincingly below the Lower Median Line Parallel and closes well below it, near its lows. Once this second bar closes, I cancel my stop loss order and enter a stop profit order three ticks above its 592.40 high, at 592.70, which is well above the just-zoomed Lower Median Line Parallel and above the bottom of the Energy Coil. |
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| The next bar makes another new low for the move but closes unchanged. But the bar after that is a wide range outside bar that closes lower, again making a new low for the move and closing near its lows. I don't see any edge to be gained by moving my stop profit order closer yet, so I wait to see what happens with the next bar. |
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| The next bar spikes lower, easily breaking through the confluence at 586 and the down sloping red Median Line, and in the process, it fills my profit order. I cancel my stop profit order and double check that I am flat. I netted 9.4 E*Mini Russell points on this trade, which is a good day by any measure. Here's the rest of the day's action: |
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Before I close, let me point out that although I didn't draw in the red down sloping Median Line set until after the Energy Coil had fully developed--at a point where the trade was fairly mature--Note how price gravitated right to the Median Line and the confluence I had chosen *BEFORE* the trade was entered. We have had numerous discussions about Median Lines and whether they were powerful enough tools in and of themselves. One of the questions was whether they carried any sense of "time" with them, and although I do not agree with some of the propositions other people have put forward about how time and Median Lines are tied together, I *do* find that Median Lines tell me *all* I need to know about time in MY OWN trading. And so often, when I have used a completely different tool set to find a confluent area, as I did in this trade example, as the trade unfolds, I'll find myself staring at a new Median Line set that I just added that gives the same information. Obviously, the confirmation is nice, but it is most comforting to know that these tools are so powerful, once mastered.
There is much to digest in this one example, and I hope I showed you the many facets I tried to highlight without muddying the waters. 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! |
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