 |
| Click To Enlarge |
|
|
April 8, 2005 Comments: Here's a look at a market we haven't shown here before, but we'll be showing more trades in the E*Mini Russell futures, as well as in the Dax futures Contract, because they often trade nice and clean, with far less noise than the E*Mini S&Ps. Looking at the first chart, price closed on a regional high yesterday, above the red down sloping Upper Median Line Parallel, but still well within its recent congestion or Energy Coil. As I view this chart before the opening, I am wondering whether price will be able to break out of the Energy Coil to the up side and then make a run above the prior highs, because otherwise, I can invoke Hagopian's Rule. Why? Because price has failed to test the blue up sloping Median Line.
On the one hand, price is consolidating, re-storing its energy, and it's well above the blue up sloping Median Line Parallel. And of course, that's a positive for price. On the other hand, price failed to test the blue up sloping Median Line and now it is congesting in an Energy Coil, re-storing its energy. If price comes out of this Energy Coil to the down side, it may have a large move ahead of it. Which way will it break out? Let's let the market tell us: |
 |
| Click To Enlarge |
|
|
Price gaps open lower, then quickly climbs out of the hole, still within the Energy Coil, but when it tries to test the up side of the Energy Coil [or try to move above yesterday's closing bar's high], it turns back down and closes below the Energy Coil, in the process zooming through the red down sloping Median Line Parallel. *Note* that price still hasn't closed below the blue up sloping Lower Median Line Parallel, though it briefly peeked below it.
Now an admission: I was still on the side lines, twiddling my thumbs. It would be easy for me to tell you it was because price still hadn't closed below the blue Lower Median Line Parallel...and that would be a valid reason to not be ready to look for a short trade set up, because it's possible price will run out of down side energy at this test of the Lower Median Line Parallel [more about this after the next bar...]. In fact, I was on the fence because I was looking right at the chart and didn't "see" the Zoom for what it was. It just zoomed into one eye and out the other, apparently...So, truthfully, I missed the first opportunity to look for a short trade set up. And the charts will reflect that today. Sometimes, you just miss 'em. So let's see what price does next: |
 |
| Click To Enlarge |
|
|
The next bar is a perfect re-test of the red down sloping Upper Median Line Parallel that price just zoomed...which is what I am *supposed* to be selling. Errr...Anyway, note that for clarity's sake, I labeled a "Zoom Bar" and a "Re-Test" bar, so now everyone knows which bar is which [if they are awake enough to see them...]. Also note I erased the Energy Coil lines, because the clutter in that area would be unreadable for all of you, so if you can't picture where the Energy Coil came in, just move back up an image or two. Now that I watched the high probability trade set up come and go...Do you think I can diagram another high probability short trade set up? Let's see...
Having missed the first re-test sale, I'll attempt to get short at a test of the same red down sloping Upper Median Line Parallel--BUT if price moves down fast from here and hasn't re-tested the zoomed Upper MLH in the next two or three bars, I'll cancel the trade set up, because I always like them to work quick and clean. So my limit sell order is to sell at 620, where I calculate price would intersect with the Upper Median Line Parallel that was zoomed. Where's my initial stop loss order? Three ticks above the mini swing high formed by the high of yesterday's last bar, which is also above the Energy Coil and above today's current high. That makes my initial stop loss order 622.20. And for a profit target, I think we might have a nice run lower here, because IF price breaks below and closes below the up sloping blue Lower Median Line Parallel, I can invoke Hagopian's Rule and that would tell me to look for an extended move lower--well past the first "most probable" line. So I am looking for a test of the red down sloping Median Line as my profit target, if there is enough time in the session. I'll use 613 as the initial profit target, so we can get an idea of the risk reward ratio. I figure that we are risking 2.2 points to make a potential 7 points, which makes the risk reward ratio just above 3 and very acceptable. Let's see it diagrammed: |
 |
| Click To Enlarge |
|
|
| Everything looks in order [must be that second cup of coffee...], so I call my broker and enter both my limit sell order at 620.00 and my initial stop loss order at 622.20. And again, I can enter both at the same time because price is trading below my entry level, so by definition, price will have to go through my limit sell order to hit my stop loss order. So whenever I can, I place my safety net [my initial stop loss order] on at the same time I place my entry order with my broker. Now the question is: Will price retrace high enough to fill me on my short entry order? |
 |
| Click To Enlarge |
|
|
Price does climb a bit higher, making the same high as the previous bar, getting me short at my limit price of 620 before turning back lower and closing in the lower third of the bar.
As I see my price print, I call my broker and check to be certain that I am filled on my limit sell order, which makes me short, and that he is now working my initial stop loss order at 622.20. Now let's see how price unfolds from here: |
 |
| Click To Enlarge |
|
|
The next bar opens unchanged and then climbs all the way back to re-test the zoomed red Upper Median Line Parallel but it runs out of energy at this re-test, right where it should, and turns lower. It makes a new low for the day and for this move and closes near its lows.
The next bar also makes a new low for the move and closes lower. Both of these bars have had nice ranges, so I eye the next bar with a little caution as the range is quite a bit narrower. And although it did make another new low, it closes higher and in the upper third of its narrower range. When the next bar also has a narrower range and then leaves a double top, I immediately take a closer look at the charts to see if it's possible to snug my stop loss order up. And after a quick peek, I call my broker and cancel my initial stop loss order and replace it with a break even stop loss order. Remember: Narrowing ranges, especially after a quick run in one direction, means price is re-storing energy. It doesn't mean a direction change *will* happen, but as I have said over and over again here, you *always* get paid back for playing, "What if..." In this case, if price is able to climb above the just-made double tops and also climb above the highs of the two bars prior to that, I'm not interested in losing any money on this trade. A move that high would also be a move back above the down sloping Upper Median Line Parallel--and I'd want to be out if price got there. But I don't want to snug the stop *so* close that I get stopped out by the noise of trading, even though this contract is not as noisy as the E*Mini S&Ps. Let's see where price heads now: |
 |
| Click To Enlarge |
|
|
Price starts to climb higher during the next bar and then turns back lower. This bar is also an "outside" bar, meaning that its high is higher than the previous bar's high and its low is also lower than the previous bar's low. And if you think about what I just wrote, you'll see that this also implies it has a larger range. In chartist's slang, this bar is an outside bar that closes lower, which is something I always like to see when short. The next bar's range is wider still and makes a new low for the move, closing in the lower third of its range. But the next bar leaves me a little nervous, because it makes a new low, but then climbs all the way back to close unchanged. At one point during this bar, we were within two points of our initial profit target, so as this bar closes unchanged, I decide it's time to check our stop loss order and see if it's as close to the action as I can get it while still giving it some room for the noise.
Just looking at the chart, I snug up my stop to three ticks above the mini swing high made several bars back, right after the double tops. This comes in at 617.70, so my profit stop is now at 618.00, which means I am playing with the market's money--always a good thing. |
 |
| Click To Enlarge |
|
|
| Price climbs higher for the next two bars, with smaller range bars and then settles into an Energy Coil. There's then a series of small range bars with alternating highs and lows. Remember, if you run hard and fast, you have to stop and take some breath before moving on...Price is re-storing its expended energy here. Looking at the chart, you can see that my profit stop is as close as it can be without being right on top of the Energy Coil, so if price comes out of the Energy Coil running to the up side, I'll quickly be stopped out for a two point profit. Or it could head lower...By the way, note that I recalculated where price would intersect with the red down sloping Median Line and moved the profit target lower, from 613 to 612.30. And I'll keep a closer eye on it now, since we are getting within striking distance. As long as price is showing us it has more down side energy to expend, we'll give it every chance to make more progress to the down side until it hits the "most probable" line or the session runs out of time. |
 |
| Click To Enlarge |
|
|
| The next bar heads lower, breaking and closing below the Energy Coil. And the next bar follows through, making another new low and closing near its lows. The next bar is a very narrow range bar and as it closes, I check the charts quickly and snug my stop up once again, this time to three ticks above the top of the mini swing high that is formed by a pair of double tops and also is part of the top of the Energy Coil. The top of the Energy Coil is at 616.40, so my profit stop is now down to 616.70. And I recalculate my profit target again and move it lower, to 611.80. Let's see if price can keep this down side momentum going: |
 |
| Click To Enlarge |
|
|
Price makes another narrow range bar and this one also heads higher, but then runs out of energy right at the test of the lower side of the Energy Coil, which is exactly what I'd expect to happen. There are multiple bottoms and tops forming the bottom of that Energy Coil and it should act as solid resistance now.
Price then heads lower for the next two bars, making a new low for the move. As the second lower bar closes, I snug my profit stop to three ticks above the floor of the overhead Energy Coil, which means I am now working a profit stop at 614.70. I then recalculate my profit target and move it lower again, this time to 611.20. And we're getting late in the day session, so I make my profit stop and Profit limit orders tied to a "MOC" or "Market On Close" order, which means that if my stop profit hasn't been hit and my profit order hasn't been hit, my broker will take me out of this position on the close. I never let a day trade turn into an overnight position! |
 |
| Click To Enlarge |
|
|
For the rest of the session, price just drifts lower in an orderly fashion, each bar making a new low for the move. After a few bars make new lows, I move my profit order a little lower and as the last bar begins, I am working a profit order of 610.90. I eventually see my profit price print and call my broker. He confirms that I was filled on my limit order and he also confirms that he has cancelled both my profit stop and the MOC stop that he was working for me. Then I have him repeat my end-of-day mantra to me: "You're flat and working nothing." The repetition of doing this after each and every trading session reinforces my thought process to check and double check that all is in good order. You will never lose money by checking to be certain your broker agrees with what position you *think* you have and what he is or isn't working for you.
This was a nice zoom and re-trace example, with several embedded Energy Coils that resolved themselves in the same direction as my position. It netted a nice 9.1 points, which is $910 before brokerage per contract and that's not a bad day's work.
As I said in the beginning of this post, I'll be making more posts with examples in the E*Mini Russell and Dax futures. 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! |
|