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February 16, 2005 Comments: The Euro FX futures gapped open higher again this morning but again, price failed to make it to a test of its "most probable" line, which led me to look for an area to get short. One of the forum members asked me via email privately about the sell set up yesterday. His question was, "I understand that the first bar did not touch the Upper MLH...but how did you know it would not a few bars later? Sometimes price stalls a bit and then makes a higher high...Why were you so confident that resistance would hold? I would never have seen this because I would be waiting for a 123 formation [lower high pivot] to alert me to the trend change." As I explained to him in my reply, price was testing the Rail Road Track spike high for the first time and that, along with the nearness of the Upper Median Line Parallel, gave me enough confluence to like the set up. But this morning's sell set up was a bit more traditional, in that there are signs telling you price has turned and then we wait for a sell set up and hop aboard.
Looking at the the above chart, you can see that price gapped open and made a spike high in the first bar [just as it did yesterday]. Note that it failed to test the Median Line. Once the first bar closed, I added a red down sloping Median Line set, to show myself the Energy potential IF a top has just been put in. It then sold off and tested the up sloping blue Median Line Parallel. When the size of the bars begin to narrow as price is testing the Median Line Parallel, price is telling you it is re-storing energy and a move is coming: It is either going to respect the Median Line Parallel and head back higher and make a run for new highs or it is going to zoom through the Median Line Parallel and expend the stored energy to the downside. When price closes below the Lower Median Line Parallel, because price failed to test the Median Line during the opening spike high bar, I am willing to attempt a short position. IF price re-tests the Lower Median Line Parallel, I will get short, with a stop a handful of ticks above the bar that just closed below the Lower Median Line Parallel. My sell order is at 130.35 and the initial stop is at 130.45. If price heads back into the Median Line set, at best this will get messy and I just don't want to risk much. The trade should work quick and clean if it is going to work. Let's see how it plays out: |
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| It takes a few minutes, but we get filled at our price and then price turns down hard. Our stop is already so tight, there is no need to snug it up right now. Our logical profit area would be the red down sloping Median Line, which comes in at 129.78, so I enter an order three ticks above this intersection level, at 129.81. There are two very key supports below this market and if price gets near the Median Line, I want to make certain I book profits. Although price could run quite a bit lower, it could also jump back out of the hole if these two supports hold. Let's see where price goes next: |
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Two bars later, we get filled at our price at 129.81. I cancel my stop order and make certain my broker is working no further orders for me. Then I look again at the chart. I really like the confluence of support formed by the prior swing low and the Gap Filler line. With a nice profit in the bank for the day already, I want to try to get long IF the support holds. Now, let's go back to the first trade: I sold a pull back AFTER price had turned, instead of trying to pick a top. Sometimes that's just a safer bet. Although I could simply buy at or just above the confluence of support, let's see if we can find a long set up that gives us good risk/reward and comes after we observe what might be a change in trend:
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| Price continues lower, zooming through the down sloping Median Line and then going on to test both of the support lines before closing back above the Median Line. This is the same set up we used to get short earlier in the day, only this is a buy, not a sell of the re-test. IF price comes back to the Median Line, I'll get long. My initial stop will be three ticks below the low of the day, which is also below the confluence of the support lines. My buy order is at 129.73 and my initial stop is at 129.60. Let's see what price does next: |
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| We do manage to get long at 129.73 and enter our stop at 129.60. Now where's our profit target? In this particular instance, I'm not worried about price having overshot the Median Line, because it just tested key support. In a sense, the stops that probably pushed price to that second line of support, the Gap Filler Line, gave price more than enough energy to make up for any it lost overshooting the Median Line. Looking at the morning action, there is a consolidation of lows, right below the area we went short, and that's where I'll place my profit order. And one more thing: If we get one more bar that closes above the Median Line before we get stopped out, I'll bring my stop up to break even. I enter my profit order at 130.28. Now let's see how it plays out: |
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The very next bar also closes above the Median Line, so I call my broker and move my stop to break even. Because we are trading within a down sloping Median Line set, if price heads back lower, I don't want to give anything away now. But as you can see, that wasn't a worry. Price coiled for a handful of bars and then spurted higher, hitting our profit target. Note that by the time price hit our profit target, time had move it to be confluent with the red down sloping Upper Median Line, so the profit target choice was a good one, even if price continued higher as the day session finished up. I call my broker, cancel my stop order and make sure I am flat and working nothing, as I do after each trade is completed.
So we worked two nice trade set ups today, one from the short side and one from the long side. And both set ups came after change in trend confirmations, making them "higher probability" trades. I hope these are interesting and informative examples of using basic Median Line techniques to take short-term profits out of the markets.
I wish you all good trading!
Act, don't Re-act!
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