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| January 31, 2005 Comments: Euro FX futures were dead yesterday, so there's little to write about or show in that futures contract. I *did* have a "watch me" area that hit yesterday in the Canadian Dollar that spawned a nice trade, and it's a trade set up I love but don't get that many chances to show on these pages. The simple idea is that there are moves that are "trendy" in nature, but don't unfold fast enough for the majority of folks to catch. In fact, what generally happens is that in a down sloping rolling chop, people tend to get short at new lows and then quickly get stopped out as the locals squeeze them for a few hours or days, and then the move lower gently continues lower. The chart above illustrates just such a move. It never "runs" lower for days and days [unless you are a very long-term player, in which case you may have gotten short at a key level and just set your stops and went away, forgetting the position, but that's a different time frame than we are discussing here], so most traders don't get the satisfaction they are looking for before their short position gets stopped out. I'll show you how to take advantage of this formation, using day only set ups, and all it requires is patience and the foresight to set your stops and profit targets once your entry is hit [and of course, the discipline to stick to your plan]. Here's the trade set up chart, zoomed in to illustrate the trade zone a bit better: |
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Now I don't trade or watch the Canadian Dollar every day. So I put in "watch zones" with my floor broker before each opening, areas where he'll call me and talert me if price gets there. You can usually set these on your charting software as well, so if your broker doesn't offer you that service, you can try a software solution. Or simply have resting orders in the market at these key levels before each opening and update the orders every few bars. Now on to the trade description:
Again, 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. Looking at the first chart, 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.
I calculate where price will intersect with the down sloping Upper Median Line and at the close of each bar, I enter an order three ticks below 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 finally get filled mid-morning and I am short at 8086. I set my initial stop at 8106, twenty ticks higher. I would also close out the trade if price closed above the down sloping Upper Median Line Parallel for two consecutive bars, even if my stop hadn't been hit, because If it hangs around TOO long up here, the trade probability goes down dramatically.
The Logical Profit Target is at the three bottoms at the 8053-55 area. Once I am filled on my sell entry, I put in my stop orders and my profit orders. I also make my profit order a MOC [Market On Close], meaning that if I am not stopped out or if my profit target is not met, my broker will get me out of this trade on or before the close. I have no intention of this turning into an overnight trade. Now let's see how the trade unfolds: |
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Price heads lower as soon as it tests the down sloping Upper Median Line Parallel. My stops are never in danger. About five bars later, I notice price making a series of multiple tops at the 8078 area, so I watch that area closer. When three tops are left there and then price makes a nice bar lower, I snug my stop loss order down from 8106 to 8081, turning it into a stop profit order. I leave my profit order alone, though. I've made sure now the trade will be a winner and if this trade plays out like most rolling chop trades, it will continue to slide lower as more sellers are dragged back into the market by the lower and lower action [So many people like to "sell in the hole" after a rally...just when we want to be getting out, as price tests or makes a new low for the move].
It literally takes the rest of the day, and with about twenty minutes left to trade, I double check that my floor broker will make sure I am either filled on my profit order or he'll get me out on the close. But as the session is getting close to drawing to a close, the floor traders look for stops to the downside and push the futures to new lows and I get filled on my profit order at 8056 for a nice "rolling chop" order. Once I get filled on my profit order, I call my broker back and make certain *all* order are cancelled, especially the MOC buy portion and that he agrees I sold and bought an equal amount of contracts, meaning I am flat and working nothing [In fact, I make always make my brokers repeat to me, onto my recorded line, "Flat and working nothing" at the end of the day, just for good order's sake. It's a good habit to get into.]
This is a gorgeous example of a "rolling chop" trade set up, one I perfected trading copper for years and years, where this is a very commom formation. Luckily, we were on the right side of the "chop" this time, which is a good thing!
I wish all of you a good trading day!
Act, don't Re-act! |
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