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| April 7, 2005 Comments: After a nice run of trades in the E*Mini S&Ps, let's move back to the currencies today. Looking at the Euro FX futures before the opening [above], you can see on the 15 minute Euro FX Global 24 hour session chart that price is in a nice up trend. If you were looking at a day-session only chart, you'd see that price was poised to gap open higher by about 40 ticks. And looking at the chart above, there's no high-probability trade set up in sight. Let's see if we get a better idea once the market opens: |
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Price climbs higher after the opening, testing the blue up sloping Median Line several times before finally closing above it. But look carefully at the wide range bar that finally closes above the Median Line: Price is testing the prior spike high made much earlier in the morning and a failure at this level will leave double tops, which could signal a potential sell off in price.
And looking at the next bar, you can see that price failed to break and hold above that early morning high and then plunged lower, closing well below the blue up sloping Median Line. And since price left the double tops and more important, didn't test the Upper Median Line Parallel, we can look to Hagopian's rule here for direction: I expect a further sell off as the day unfolds. Can we identify a solid trade location that will offer us good risk reward? |
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| The first thing I do is use the just-made high at the re-test of the prior top as a pivot and add a red down sloping Median Line set, to get a clearer picture of the slope [or "rate of decline"] implied by the current set of three alternating pivots. Remember: The Median Line will give me the slope [direction and speed, meaning where is price likely heading and how fast will it likely get there] and the Upper and Lower Parallels will give me the areas where price should run out of energy. Now let's see if we can diagram a solid trade set up: |
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My eyes are immediately drawn to the area where the blue up sloping Median Line intersects with the red down sloping Upper Median Line Parallel. Is this an Energy Point? To me, it's not a classic one, because there aren't enough confluence inputs--And I've just drawn in the red Median Line set, so I'll just think of it as a very nice area of confluence. I am *hoping* it acts like an Energy Point and attracts price, letting us get short before price is turned back down by the overhead resistance. So we'll put in an order to sell Euro FX futures three ticks below this area of confluence. I make the confluence point out to be 129.56, so our limit sell order will be at 129.53.
The initial stop loss order is simple: I'll put it three ticks above the morning's high, which was 129.62, so our stop loss order will be at 129.65. Our initial risk on the trade will be 12 ticks.
Since price traded nicely above the blue up sloping Median Line yet failed to test the Upper Median Line, we can invoke Hagopian's Rule, which means we are now looking for an extended move in the opposite direction. Because of this failure by price to test it's "most probable" line to the upside, it's more than likely it will now run through its first "most probable" line to the down side. Normally, I'd consider the blue up sloping Median Line Parallel as the first profit target, but in this case, I expect price to run quite a bit further. Instead, I suspect price will test the red down sloping Lower Median Line Parallel, before this run is finished--assuming it has enough time during the day session. So that will be the profit target. I estimate that the intersection with this Lower Median Line Parallel would occurr at roughly 128.70, so that will be my initial profit target. I can fine tune the level as price unfolds if that's needed.
We're risking 12 ticks on this trade to make a potential 83 points. The risk reward ratio on this trade is nearly 7. And in terms of probability of success, while this trade set up does not have the near 80 percent success as the zoom and re-test set up, these failures at prior tops tend to also have a very high probability, one that I rate above 70 percent. The only problem is: Will price retrace back high enough to allow us to enter the trade? |
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Price makes a new low during the next bar and also closes lower, nearly testing the red down sloping Median Line. But the next bar reverses higher and closes near its high. And then finally, the next bar just touches the area of confluence, getting us short at our price of 129.53 on the way to making a high of 129.55, before turning back lower. In fact, this bar is nearly the mirror image of the prior bar, closing on its lows. This is a classic sign that price has expended its energy on its run higher--And price ran out of energy right where the Median Lines told us it would.
Details, details, details: Again, as I see my entry price print, I immediately call my broker and check that my limit sell order was filled. Once he confirmed the fill, I double check that my initial stop loss order is in the market at 129.65. Then I give my broker a limit buy order at 128.70, my profit order, and I make it "OCO" or "One Cancels the Other" with the initial stop order. Now let's see how price unfolds from here: |
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The next bar is a narrow bar that closes higher but the following bar is a wide range bar that makes a new low for the move, breaking below the blue up sloping Median Line Parallel and testing the red down sloping Median Line before turning back higher and closing above both lines. The next bar is a narrower range inside bar that closes higher and its followed by a bar of similar range that closes on its lows, but has the same high as the wider range bar two bars back--leaving double tops. When the ranges narrow like this, especially after price has tested one of the areas where price *may* have run out of its down side energy, I always take a close look at the charts and see if I can possibly snug up my stops. The narrowing of the ranges suggest price is re-storing energy, getting ready for its next move. IF it takes off to the up side with renewed energy, I want to make certain I have at least checked where I am working my stop order, to be certain I am comfortable with the risk.
In this case, I decide to snug my stops closer to the action. The logical choice is to move my initial stop down to three ticks above the double tops just formed. They come in at 129.47, so my order is now a profit stop at 129.50 and a move to this level will be above the resistance formed by the down sloping Upper Median Line Parallel. I call my broker and cancel my initial stop loss order and replace it with this new profit stop. Let's see what happens next: |
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| The next bar is a wide range bar lower bar that makes a new low for the move and again tests the red down sloping Median Line. *NOTE* that I have marked this chart with comments in pink directed towards those of you that have constantly asked me if there were appropriate places, using Median Line theory, to take partial profits and also add additional units or add back what you have taken off. I generally haven't shown these areas in the examples shown here, because it makes the size of the posts longer and longer, but this was a good example to begin adding these comments, so when I deem it appropriate, I'll show these "scalping techniques" as well. Those of you that do not scale in and scale out of positions, simply ignore the scalping comments shown. I like how price is unfolding and at the moment, I see no need to change any of our orders. Let's see where we go next: |
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After the run to new lows and the test of the red down sloping Median Line, price stalls and begins trading in a narrow range. Again, note how effectively the Median Line predicted where price would run out of energy! And once the energy was expended, price needed to re-store energy, hence the Energy Coil formed.
You can see that price formed smaller and smaller bars until at last, it had re-stored its energy. It then made a run higher, breaking above the red down sloping Upper Median Line Parallel and testing the blue up sloping Lower Median Line Parallel that had been zoomed right before the Energy Coil formed. This re-test, especially because it is also confluent eith the red down sloping Upper Median Line Parallel, should be the area where price stalls as it runs out of up side energy--These confluence areas *should* contain the pull-back. And if you look at this bar, you'll see that price closed in the lower third of its range, a sign that price is struggling to make any further headway to the up side.*For scalpers only!* This re-test of the zoomed blue up sloping Lower Median Line and its confluence with the red down sloping Upper Median Line Parallel is a perfect area to either sell out the portion that you took back at the re-test of the red down sloping Median Line test[s] OR to add additional units. If you add back units or net add additional units, the stop would be the same as the current profit stop, three ticks above the double tops, at 129.50. Let's see if price finds this area of confluence too tough to get through: |
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| The next bar is a very narrow range bar that closes lower. Remember how I feel about narow range bars! I look carefully at the chart again and know it's time to be certain that IF price now gets above the highs it just made when it tested the just-zoomed blue up sloping Lower Median Line Parallel, I don't want ot be in this trade. I cancel my profit stop and replace it with a new one, three ticks above the swing high price just made in the prior bar. The high of the prior bar was 129.40, so our new profit stop is at 129.43. Let's see what price does after this narrow bar: |
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This is more like it! Price makes two very large range bars lower. The first bar briefly moves below the red down sloping Median Line, but manages to close above it [but still close to the lows for this bar]. But the second one zooms through it and closes much lower, making a low roughly ten ticks above our profit target and again closing in the lower third of this wide range lower bar. So far, price is showing NO sign that it is out of down side energy.
But remember: We always get rewarded by playing, "What if..." as price unfolds in front of us. And as this bar closes, we have more than 60 potential points of profit in this trade. Price *will* run out of down side energy somewhere, since we are NOT going to zero...We have a solid profit target at 128.70, but to protect some of these profits, I snug our profit stop again, this time to three ticks above the high of this last bar. A move above this bar's high will also be a move back above the down sloping red Median Line. And though folks that aren't short may be interested in selling a re-test of this same down sloping Median Line [because it's a potential zoom and re-test set up], we have such great trade location now on our entry that we *must* do the prudent thing and make certain we lock in profits IF the unexpected happens. As I've said before, to take all the emotion out of these decisions, the best way to handle that possibility is to keep playing, "What if..." and snugging stops where it's appropriate, because so many traders freeze when the unexpected happens and watch trades that were just full of juicy potential profits turn into losing trades. And that is a sin.
The high of this last bar is 129.05. That's also the close of the prior bar. Our new profit stop is now at 129.08. When you look on the chart, you'll see that even if the 129.01 area IS a potential zoom and re-test sell area, a move above the close of this last bar, especially one that makes it to 129.08, has taken out some solid overhead resistance and a zoom and re-test entry in this area might be a loser if price made it this high... |
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next bar continues lower, making a new low and closing lower. And
though the next bar opens unchanged, it does make a new low, pressing
through my profit orderat 128.70 before closing unchanged. As always,
when I see my price print, I call my broker and make certain I am
filled and that I am flat. Once he confirms this, I make certain he has
cancelled my other orders, and I make him repeat my mantra: "You're
flat and working nothing." Let's see how price finished out the day
session: |
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You can see that price went a bit lower,
but we caught nearly all of the profits available. This was a classic
example of a failure of price at test of a prior high and once you see
that failure unfold, the best way to trade it is to then identify a
trade entry area with good risk reward to enter on a pull back, rather
than just trying to get short once you see price making what you
*think* is a failure by selling "at the market." By waiting for a set
up with solid risk reward after you see these failures, you greatly
improve the odds of this being a profitable trade AND you greatly
dampen the emotions of the trade, IF price retraces and let's you get
short at your potential entry area. You may miss a few moves by waiting
for the retraces, but you'll find the results much more satisfying.
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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