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February 19, 2005 Comments: Today, let's look at a high probability trade set up in the Canadian Dollar Futures. You've seen me show zoom and re-test set ups here many times before but this particualar trade set up is even more reliable, because of the addition of Fib confluence in the same area as the re-test of the zoomed Lower Median Line Parallel. Energy Points are areas where confluence attracts price. Think of these areas as almost magnet-like, in that price seems drawn to them like moths are drawn to a flame. And once price gets to these areas, expect either a return to the prior direction or an acceleration of price in the same direction [So for those of you that like to use stop and reverse orders, Energy Points are perfect areas to employ them].
Looking at the image above, you can see I used a "second pivot" Median Line, which simply denotes that the second and third pivot I chose were not the first major pivots directly following the first or "A" pivot. The trade set up analysis begins by noting that price closed the prior day [Thursday] just below the Lower Median Line Parallel, in effect "zooming" through the Lower Median Line Parallel on the closing bar. This sets up a sale area when price re-tests the Lower Median Line Parallel from below. Now note that price gaps lower on the open the next morning [Friday], further strengthening the validity of the down move. Now keep in mind what Dr. Andrews said in his original course material about prices gapping through or "zooming" these types of lines: "When prices pass through or gap the ML [or Median Line Parallels], they will pull back to it. Always expect a retracement back to re-test these lines and once they are tested, a resumption back to the trend." So our trade is to get short IF price gives us the oppportunity by pulling back to re-test the Lower Median Line Parallel from below. |
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| Looking at the next chart, you can see a perfect example of an Energy Point. Once price makes a spike low during the first bar of the day, I measure the distance from that low [labeled "E"], back to the prior swing high [labeled "D"]. I then calculate the 38.2 percent Fibonacci retracement, which comes in at 8138. Now look where this area is: Right at the area price will have to touch to re-test the Lower Median Line Parallel. This is a classic Energy Point, and once you learn to identify them, they can be used to enter very high probability trades. |
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| Looking at the next chart, you can see our simple tactics: We put an order in the market to get short at 8138, at the Energy Point. We expect price will be drawn to this area and will then likely reverse back in the earlier morning's trend lower. Our initial stop will be three ticks above the high of the second to the last day's bar from Thursday, which comes in at 8142. If price has enough energy to get to 8145 and stop us out, the "zoom and re-test" probability of being successful goes down dramatically, so we want out if price gets that high. Note: We'd ALSO get out if price closed above the Lower Median Line for two consecutive bars without stopping us out, because if it spent that much time above the Lower Median Line, the "zoom and re-test" is most likely not working. Let's see how this plays out now: |
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| You can see in the next chart price climbed back to re-test the Lower Median Line Parallel and Energy Point, just getting above our entry point. But once up there, it found lots of sellers and turned on a dime--Just as this trade is supposed to work! Let's see what the next few bars show us, so we can decide on a Logical Profit Target and try to move our stops to at least break even: |
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| Price immediately went into an Energy Coil, trying to re-store the expended energy from the earlier spike lower and then the climb out of the hole. There is really no room to snug our stops to break even here and give the trade any kind of room to work, so since they were tight stops to begin with, let's try to be patient and see if price comes out of the Energy Coil to the up side, stopping us out, or to the down side, giving us a profit opportunity: |
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| We finally get a close below the Energy Coil, leading me to think we may see some further movement to the downside here. But it's getting well past the middle of a Friday trading session, so I want to identify a high probability Logical Profit Target, while price seems to have some down side momentum going. I measure the distance from the prior swing low at Pivot "C" to the last swing high at Pivot "D" and then calculate the 38.2 percent Fibonacci retracement of that distance. It comes in at 8110, and from my days of standing in the currency pits at the CME, I know the "smart" floor traders will have that number on their "numbers list," and you can bet they'll attempt to buy the first attempt price makes to trade through that area, especially on a Friday afternoon. And then if it doesn't bounce, they'll push it lower, trying to run any resting stops below this first major Fibonacci number. But I'm only concerned with getting my money out of the trade, clean and easy. I put in an order to exit my short position three ticks above this major Fib number, at 8113. And now that price has broken below the Energy Coil, I snug my stops to three ticks above the top of the Energy Coil, which just happens to mean I am now working a stop profit order at 8137. I also make tell my broker to make this order part of a contingency order, paired with a MOC [Market On Close] Stop. This means that if either my profit order or stop order doesn't get hit during the session, my broker will get me out at the close. I do not want this to turn into an overnight trade. NEVER turn day trades into overnight trades. Let's see what price does now: |
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You can see price came down and just kissed the major 38.2 percent Fibonacci retracement at 8110 and then shot back higher. We were filled on the spike down to test the Fib area, so we are not concerned with the whats or whys of it climbing out of this hole--but as I always say, it's best to leave the party before the rush starts, because the door often gets very small...Once I see price trade through my profit order, I call my broker and make sure both my stop profit order AND my MOC STOP orders are cancelled. I then check that he agrees I am flat, and as a last double check, I say to him, and have him repeat to me, " I'm flat and working nothing, right?"
This was a classic example of how a "zoom and re-test" should work and it had the added reliability of the Energy Point confluence going for it. I hope you find it an interesting and informative presentation of a simple trading technique that you can put into your trading tool kit.
Have a great weekend. I wish you all good trading!
Act, don't Re-act! |
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