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| April
4, 2005 Comments: Looking at the charts before the opening, I first
noticed two things: Price had recently tested the red longer term
Median Line and had just tested the red longer term Lower Median Line
Parallel. And though the chart, in general, looks like this run lower
may not yet be finished, because price tested the Lower Median Line
Parallel and has now bounced back higher, until proven otherwise, it is
headed back to a test of the red Median Line [or at least it will
consolidate in an Energy Coil, re-storing its expended down side energy
before making a run for new lows]. After Friday's large gap higher
opening and large run lower, before the opening, I expected a quieter
type of day. And in fact, I was hoping for a test of support, so I
could attempt a long position if I could find an area with a low risk
entry area. Let's see how the market opened: |
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Prices open a little lower and continue
lower for the first four bars, before forming what looks to be a pivot
low at 1170.75 on a narrow bar. As the next bar unfolds, it is a wider
range bar higher, and when it closes, I add a new Median Line set and
begin looking for an area to attempt a long position. The next two bars
are higher as well, so perhaps I won't find the trade area I am looking
for. But what would I like to see?
If you remember back to
Friday's action, the 1171-1172 area held a great deal of confluence and
support. And we climbed out of this same area quickly again this
morning. Ideally, I'd like to buy a re-test of the up sloping Lower
Median Line, with a stop just below the lows made earlier this morning
at 1170.75.Eyeing the Lower Median Line I just added and doing the
math, I'd love to get long at the intersection of price with the Lower
Median Line Parallel, which would be at 1171.25 and then place my
initial stop loss order at 1170, which would be three ticks below the
morning's low. If price made new lows now, the idea would most likely
be wrong--And I always like to minimize losses. The initial profit
target would be a test of the Median Line I just added, which currently
comes in at roughly 1182. To size up the risk reward ratio, I'd be
willing to risk 1 1/4 S&P points to make 10 3/4 S&P points,
which is a risk reward ratio of over 7...enough said.
However, it is important to note that this
trade set up DOES NOT carry anywhere near the 75 to 80 percent success
probability of the trades often shown here. Because we would be trading
off of Median Line sets that hadn't been tested, I'd rate the
probability of success at something more like 55 to 60 percent. But
with the small stop loss involved [1 1/4 points] and the gawdy risk
reward ratio, this is still a trade I'd take, IF the market gives me a
chance to take the entry. Let's see how it looks on a chart: |
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Ok, the orders look good, so I call my
broker and place the entry to get long at 1171.25 and I also put in the
initial stop loss order at 1170. Remember, because price is trading
above these prices, I can put both orders into the market because by
definition, price cannot hit my stop loss order without first hitting
my entry order.
And before someone writes on the forum,
asking about the support often found at "natural numbers" like 1170,
while there is some credence to that thought the first time they are
tested, I'd suggest that since we have recently been below the 1170
area and since we also have such a nice heavy area of support at
1171-1172, IF price breaks below the morning's lows, we'll find stop
loss orders, not buying orders, as traders scramble to get on board for
a ride to new lows...Now let's see what the market does next: |
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| Price
DOES trade lower for the next three bars and I am SURE I am going to
get filled on my entry order at 1171.25, but the low for the last bar
is 1171.50 and the bar closes at 1172.25. My entry order was missed by
one tick! Did I try to cut it too close? I don't want to chase price,
but I also don't want to be "left standing at the station while the
train pulls out," as they say. I make a quick assumption and draw in a
new blue up sloping Median Line set. Then I calculate where price would
intersect with it's Lower Median Line Parallel during the next bar and
that comes in just below 1171.75. Because the initial stop loss is so
close, I decide to move that up a touch and call my broker. I change my
limit buy order to 1172, but I leave the initial stop loss order at
1170. So now I am risking 2 S&P points to make 10 1/4. There's
nothing wrong with that. But will price trade back down and test the
blue Lower Median Line Parallel or is it already heading higher,
leaving me empty handed? |
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| Price
does come down just a bit during the next bar, making a low of 1171.75
and getting me long at 1172 before spiking higher and closing near its
highs. The low of this bar was one tick below my order! Sheesh! Once I
see my price print, I call my broker and make certain I was filled on
my entry order. Then I double check that he is working my stop loss
order at 1170. Now I add a profit order at 1182.25 and tie it to my
stop loss order, making them "one cancels the other," or OCO. This
means that if one of them gets filled, the other is automatically
cancelled by my broker. Now let's see where price goes next: |
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| Price
makes another wide range bar higher, testing the blue up sloping Median
Line but just closing below it. The next bar is a bit smaller in range,
but not so small as to concern me and it makes new highs as well,
though again, it fails to close above the Median Line after briefly
peeking above it. The next bar is again a wide range bar and this one
again makes new highs--and closes above the Median Line, in the upper
third of its range. So far, things look good for this position. This
bar closed at 1179, so we are just a touch more than 3 S&P points
from our profit target. |
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next bar also makes a new high and if you look closely, the prior wide
range bar has a lower low than the bar before it, as well as a low that
is below the current bar. I file that away for a moment as a potential
mini swing low, because we are at the point where I'd like to be
snugging my stops closer to price action. |
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doesn't take me long to decide to snug my stops up. I move them up to
three ticks below this mini swing low. The low of that wide range bar
serving as the mini swing low was at 1176.50, so this now gives us a
profit stop of 1175.75. I am now playing with the market's money and if
my profit stop is hit, I'll at least take in 3 3/4 S&P
points...Let's see what the market does now: |
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Price makes another new high, well above the Median Line but the best the next bar can do is re-test that high, before closing lower, below the Median Line and in the lower third of its range. Just as I start to worry about the double tops that are now left above the Median Line, price spikes higher again, making a new high at 1181.25 as it easily takes out the double tops. But price does close back below the Median Line, and this bar has the same low as the prior bar, leaving me with double bottoms at 1179 to contend with.
We came tantalizingly close to our 1182.25 profit target, so again, I am unwilling to give back much of this potential profit. And remember that I said at the beginning of this piece that I expected a quiet day, with SOME up side movement, so I don't expect we'll see another ten points to the upside. I am trying to drag as much profit out of this range as as I can. In response to the double bottoms at 1179, I call my broker and snug my stop profit order to three ticks below the double bottoms, at 1178.25. This order is dangerously close to price action, and I realize that. But if I get stopped out, I'll still have booked 6 1/4 S&P points. I don't want to see these profits evaporate if price turns on a dime and heads back down to test either of the Lower Median Line Parallels as the session gets nearer to its end. |
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| Price
comes closer still to our profit target, making a new high at 1182 and
missing my profit order by one tick! This is one of those days where
each tick makes a difference, as the size of the daily range contracts.
As this bar closes, I call my broker and add a "Market On Close" stop
order, meaning that if I don't get filled on either my profit order or
my stop loss order, he'll take me out of this position on the close and
automatically cancel the other two orders. Under no circumstances do I
want a day trade to turn into an overnight position. |
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| The
next bar runs through the blue up sloping Median Line, making a wide
range bar lower and closing in the lower third of its range. It misses
our profit stop by one tick [As I said, it's one of those days where
one tick can really make a difference...]. The last bar of the session
is coming up and there's really nothing for me to do here, other than
see whether I get stopped out at my profit stop at 1178.25, or if price
rallies up to take me out at my profit target at 1182.25 or if my
broker ends up stopping me out for a profit on the close. I can do
nothing but watch: |
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Price does not go any lower in the final bar and though it rallies, it doesn't make a new high. My broker takes me out at the close, at 1180.25. As the market closes, I call my broker and make certain he took me out of my position and that I am flat. Then I double check that he cancelled all orders. As a triple check, I make him repeat my mantra: "You're flat and working nothing."
I net 8 1/4 S&P points on the trade and that's a good day's work. This was not a "pretty" trade or one that relied on anything other than nimble thinking and good money management practices. Not every trade, win or lose, will be built on wonderful trade set ups that carry 75-80 percent success rates. And many days, you'll find yourself in markets where one tick CAN make a difference between getting into a trade and watching the train leave the station as you're standing there...And that's where nimble thinking comes in and constantly making yourself ask, "What if...?" And of course, in markets where one tick seems to make a difference at every key junction, you sometimes feel like there's some luck involved in pulling out profits. But then, many experienced traders say you make your own luck, by preparing yourself to think quick and react quick and by gaining more experience each time you view the markets.
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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