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| February 6, 2005 Comments: On Monday, I outlined a "rolling chop" trade set up and showed how it played out profitably, netting 30 ticks in the Canadian Dollar. The above chart illustrates Monday's trade, as a review. On Tuesday, I made a similar trade in the Canadian Dollar, using the same set up, and first I am going to show you the setup and how it played out. Then I'm going to share a very inciteful email from Laura, one of our Action-Reaction Lab Forum regulars, about Monday's trade that shed an interesting light on both Monday's and Tuesday's set up, and I'll go deeper into what I found when I went back and looked at literally hundreds of these "rolling chop" trades I've made over the years, making certain I knew the answer to her questions. But first, here's Tuesday's trade set up: |
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Just like Monday, the idea is that we are in a rolling chop lower and that we want to sell a covering rally, where the people that "sold in the hole" are scrambling for the doors. You can see that has happened time after time in this move lower. You could have caught a handful of these moves by drawing an inside sliding parallel and selling rallies to it, in the same manner that I am about to use to sell the rally to the Upper Median Line Parallel, just as I did yesterday [Monday].
I calculate where price will intersect with the down sloping Upper Median Line and at the close of each bar, I enter an order at this intersection point. Since there is no confluence with Fib reatracements or other Median Lines, it isn't a classic Energy Point, just a sell set up at a down sloping Upper Median Line Parallel. I enter an order to go short Canadian Dollar futures at 8068 and if I get filled, I'll set my initial stop at 8083, fifteen ticks higher. This is several ticks above a triple top to the "left" of the current price action, and if price has the strength to move above the Upper Median Line, as well as the resistance formed by these three tops, I just plain want out.
The Logical Profit Target is near the test of the morning's lows at 8043, which would be a profit of twenty five ticks. There are multiple bottoms at this area and IF price climbs high enough to get me into this trade, it's already near lunch time, so I won't have too long to ride the trade. And like Monday, this is a Day Only trade, and I will enter a MOC stop order IF price rallies enough to get me into this position. Now let's see how the action plays out: |
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As you can see, price begins to climb higher and I get into my short position just as the rocket takes off, so to speak. I never had more than two ticks profit in the trade, and though I could have briefly scratched the trade, I was soon stopped out at my price at 8083. I caught a nice 30 ticks profit on Monday, trading the "rolling chop" and Tuesday, I got chopped and gave back fifteen ticks. Again, losing trades can be as informative as winning trades, especially if you take the time to look at why the trade failed. Obviously, some trades just are going to be losers. Many traders make a great living with 35-40 percent winners, so they know many of their trades will be losing trades. That's why good money management and risk reward ratios are so important. I personally shoot to keep my win to loss average above 70 percent, and considering that I am working with a set of tools that are built around a tool [the Median Line] that tells you where price is going 80 percent of the time, that's a very reachable goal.
Now, I got Laura's email about twenty seconds after I was stopped out of Tuesday's trade and here it is:
hi tim,
i've read with pleasure your example of the classic rolling chop formation today on the medianline. and i have a more simple question. if you look at your first chart it's obvious that price never reached the medianline. so could we assume the hagopian rule? and if you would put some andrews trendlines on the chart, we should see that price is behind a P5. with these two facts, isn't it a little bit risky to short again? or do you "just" say, ..i short until the upper medianline is broken? i just ask because i wouldn't have shorted after this down move again
thanks laura
On the forum, I glibly replied:
Laura:
Well, it isn't a classic Andrews technique, but something I learned for day trading copper. It often works like a charm.
Just for the record, I shorted it again today, after it made a new low, and got stopped out for a fifteen point loss, so your observations may be just as correct as the points I made yesterday. It works well for me, but obviously, nothing is 100 pct. And pondering your question, I obviously in hindsight see today's short, especially, was a lower probability trade entry.
Tim
While I tidied up my office that afternoon, her questions rolled around in my head and I began to wonder if I paid MORE attention to Hagopian's Rule, how would it have impacted all the "rolling chop" trades I've made in the past fifteen or twenty years? Here is Hagopian's rule, as stated in Dr. Andrews' original course material:
Hagopian’s Rule:
When prices reverse trend before reaching a line at which probability indicates such a reverse could start, proper action may be taken in buying or selling, as soon as prices cross the trend line they were moving along before reverse. (Mar. Corn, e.g.)
A large countermove is indicated and confirms the first action as above, when prices cross the first Trend Line sloping away from the original line. This line may be a trend line, a median line, a reaction line, or a moving average line. The rule still applies.
And here's a more palatable description, directly from Laura:
Price should reach about 80% the ML and if not, means before price reach the ML it reverses, then you have a high possibility of a large countermove. this countermove will take price above the last pivot. And if you draw a line from pivot A to C, then you would have your entry trigger.
Now, I literally spent thirty or fourty hours this week, going through hundreds of these actual trades. Luckily, I keep charts with my records of each trade, going back...well, nearly thirty years, so the task is a little easier because I can do a quick visual once I locate each "rolling chop" trade to see IF Hagopian's Rule applied in each trade, and how it effected the outcome. While it turns out that in the vast majority of the trades, price HAD tested the measured line, either the Median Line or Upper/Lower Median Line Parallel, I found that in the cases where price had not made it to the "line of probability," taking the trade as price stretched back out did not have as high a probability of being a winning trade as when price HAD tested its "line of probability." I calculated that the trades that were taken after price had tested its "line of probabilty" were profitable about 75 percent of the time., while those taken when price hadn't reached its "line of probability" were profitable about fourty percent of the time. In other words, Laura's observation regarding Hagopian's rule was spot on, and I thank her for asking the question.
Regarding the pivot counts, in many of these cases, I see little, if any, value in anticipating a turn just because I can count five pivots. So often, I see P7, P9, P11 form...To me, the most important aspect of the pivot count is drawing in the P0-P4 line and IF that line is violated, then I rethink my view of what I thought was the trend. But until P0-P4 is taken out, I am not much of a pivot follower. Dr. Andrews used pivot counts to organize his thought process in each market, but unlike Elliot Wave, for example, he did not look for the fifth pivot to be an end of the trend in the sense that he would automatically assume the trend had ended once he could count five pivots.
Now let's take one last look at this market, using a sixty minute chart, and see one aspect of Hagopian's Rule [plus some practice with measuring objectives and some reading between the lines in Dr. Andrews' original material] that I DO use regularly: When price fails to make it to the Median Line and then heads quickly in the opposite direction, IF the Median Line Parallel price is approaching hasn't repelled price before, I expect price will run through it and run through it about as far as price missed testing the Median Line. If this description is clear as mud, maybe a picture will be worth a thousand words... |
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You can see just how well the measuring objective forecast the size of the "overshoot" in this case. I hope these examples of back-to-back trades, one a winner, one a loser, are interesting and informative. And Laura, just keep asking those questions. I had to spend about fourty hours of grunt work before I felt comfortable with my answer, but in the end, it was worth the effort: In most cases, I already used Hagopian's Rule...and when price didn't test its "line of probability" the probability of success of this type of trade drops dramatically.
I wish you all a great week of trading!
Act, don't Re-act! |
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