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March 3, 2005 Comments: I have been working on what has become a 65+ page presentation on a series of trades that occurred in late February. I had intended to present them day by day here, but the work load of preparing the charts and commentary while continuing to work on the project proved to be too time consuming, so finalizing the presentation took first priority. But now that the chart portion of the presentation is finished, I am going to post a "peek" of it here, as a Thank You to all of you for being patient while I was locked in a dark room, laboring over these charts and their accompanying commentary.
What makes these particular trade set ups a bit more unusual is that they revolve around the use of Action/Reaction Lines and as more than one member has commented, we haven't shown many examples of A/R Lines being used successfully [Nor have they been shown anywhere else, in books or on the internet, since most people have NO idea what they are and how they function]. So for better or worse, let's get started with just one of the trades that revolves around a set of Action/Reaction Lines. Looking at the chart above, you'll notice several things: First, I began by drawing in a standard blue up sloping Median Line and its Upper and Lower Median Line Parallels. When price broke well above the Median Line but failed to climb high enough to test the Upper Median Line Parallel, we know from our recent discussion of Hagopian's Rule that a counter move of some significance is likely to occur. And indeed, price begins to sell off, closing the day right at the up sloping blue Median Line and then gapping open below it the next morning. Price then climbs back up to test the gapped Median Line [a classic Zoom and Re-Test of a Median Line, right out of Dr. Andrews' Original Course Materials] and then goes into an Energy Coil, which is nothing more than a trading range. As we noted last week, price carries a certain amount of "potential energy" with it and once this energy is expended, it must re-charge itself before moving on--either by forming an Energy Coil and range trading until it has re-stored its spent energy or by the infusion of additional "new" energy, via news or events.
Once price begins to break down below the Energy Coil, I draw a line from the spike high above the Median Line through the Price/Time extreme of the Energy Coil. In effect, I have drawn a simple trend line, connecting a spike extreme to the upside, where price spent its final bit of Energy, to the point where it is clear that price has re-stored its potential energy and has begun its new journey. To say it another way, I connected the point in Price/Time where the gas tank was empty to the point in Price/Time where the gas tank was full. I will use this line as my Center Line. If I've picked it correctly, it will serve as much more than a trend line. Why? The Center Line should carry the measurement of the potential energy stored by price in the form of a frequency that we can then project forward as a measuring stick, telling us when price is likely to be running out of energy. But how do we capture that frequency? When we use Median Lines, which are a specialized case of Action/Reaction Lines, we start with three pivots, and those three pivots give us the frequency, in effect allowing us to project, as price moves forward through time, just where price is likely to run out of energy on either side of the Median Line. But here, we are beginning with only a Center Line. We don't have the traditional three pivots to provide us with the frequency to project around the Median Line [or in this case, the Center Line].
But there is a way to capture or measure the frequency of the energy potential, if we can find another price extreme related to the same Center Line. Let's look at the next chart and see if we can find just such an extreme: |
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| I look below the Median Line and see the spike low that proceeds the Energy Coil. And before anyone asks, we HAVE discussed this very set of Mirror Spikes, one above and one below the Median Line, on the forum. They are, in fact, equidistant around the blue up sloping Median Line, but that is NOT a requirement for choosing an Action Line, just a nice quirk of this particular example and its beautiful internal harmonic structure. To use this spike low, I draw a line that is parallel to the Center Line, right through the extreme of the lower spike. This lower line is the Action Line, and the distance from the Action Line to the Center Line carries the frequency of price's energy potential in the same way the Upper and Lower Median Line Parallels show the areas where price is most likely to have expended its potential energy as it moves about the Median Line. Now watch how I use this simple measurement to project the energy potential of price into the future: |
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| I take the measurement and project it to the right of the Center Line and then draw a line parallel to the Center Line through this point. This gives me the 1st Re-Action Line. And unlike the Median Line and its Upper and Lower Median Line Parallels, I do it with no third pivot to work from. As Newton said, "For every Action, there is an equal and opposite Reaction." Babson, in his earlier work, used this simple and powerful concept to create Babson Charts, which he used to measure and project likely activity, generally relating to the function of economic cycles. Dr Andrews and George Marechal then took Babson's simple tool and after tens of thousands of tests, found that it could be used in a novel way to project price as it related to time, which in effect means that it captures or measures the stored potential energy of price and shows where it is likely to be expended. This was a very powerful leap forward and a major improvement over the simple Babson Charts. Now let's see if we can use this new set of lines to make some simple projections and work our way through an actual trade using these lines: |
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Note in this next chart that I added the equidistant Inside Sliding Parallels above and below the blue up sloping Median Line. We can use them to help us find an area to initiate a trade. As price moves well below both the bottom of the Energy Coil and the Lower Inside Sliding Parallel, it's important to remember that price was unable to test the Upper Median Line, thus invoking Hagopian's Rule. This means we are expecting a substantial move to the downside and the "most likely" line or target will be the Lower Median Line Parallel. Let's see if we can find an area to get short, anticipating that price will indeed test the Lower Median Line Parallel. Price does make one brief run higher but doesn't test the Center Line. As I have said before, I like price to be "stretched" when I am entering against the current direction of price, because in fact, I am anticipating that price is just about to run out of energy as my order gets filled. That is the theory of this style of trading, in a nut shell: Project where price is likely to have expended its energy in one direction and then enter a position to try to capture the likely move in the opposite direction.
As price pulls back below the lower Inside Sliding Parallel again, I measure where price would intersect with the Center Line and enter an order to go short at that level: 8122. This area has the upside protection of the confluence of resistance formed by the Center Line and the Sliding Parallel, as well as the bottom of the prior Energy Coil and its many bottoms. IF price rallies high enough to get us into a short position, we'll use this area of confluence as protection and place our initial stop three ticks above the top of the prior Energy Coil, at 8137, which would also be well above the Center Line and the lower Inside Sliding Parallel. As I said earlier, our Logical Profit Target is the Lower Median Line Parallel, which comes in at 8092. For this trade, we are risking 15 ticks to make thirty. And after studying literally thousands of these actual trade set ups, I know the probability of this trade being successful approaches 75+ percent, so I am quite comfortable with the trade set up and the risk reward it offers. Let's see where price heads next: |
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| Price moves higher, getting us short and then runs out of energy right at the Center Line and turns lower. Its down side movement accelerates, once it changes direction and we find we are nearly to our profit target as the bar closes. Though I am tempted to move the initial stop to a "break even" stop, I leave it at its original level, but there would be nothing wrong with snugging the stop up, if you feel like doing so and that matches your trading style. Because this is the first bar of trade, I generally don't change the stops, unless price has closed beyond a major barrier. Let's see what happens next: |
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Price meets and surpasses our profit target during the next bar, taking us out of our position for a nice 30 tick profit. I immediately call my broker and cancel my stop loss order and make certain that he agrees I am now flat and that I am working no further orders. As I have said so often here, I make him repeat to me: "You're flat and working nothing." It's a good practice to add to your trading habits. Make it automatic to always check your position and your pending order[s] status, whether you are trading with a "live" broker on a phone or using an electronic trading platform. Over time, this will save you untold amounts in "would be" errors..." that never seem to go in your direction.
Note that though price briefly spiked below the Lower Median Line Parallel, it did not close below it [or close twice below it, a measure I use when day trading].I file that away in the back of my head, in case I decide to stalk a long position. I can use the distance of the spike below the Lower Median Line as a guage of the "slippage" price is adding [plus or minus] to our measurement of its frequency. And note that while price did test the blue up sloping Median Line Parallel, it DID NOT test the down sloping Action Line after it tested the down sloping Center Line. Hagopian's Rule applies here as well, because Median Lines are just specialized cases of Action/Reaction lines, so all the tools we have collected and tested can be applied to A/R Lines in the same way they are applied to Median Lines. The failure of price to test the Action Line to the down side would suggest an up side move of some important magnitude is likely, so we'll watch to see if price continues to hold above this up sloping Median Line or if it heads back lower to test the Action Line: |
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| The next day, price traded above the Lower Median Line Parallel for the first few hours and then began to look like it might head lower to test the Lower Median Line Parallel and perhaps a Sliding Parallel drawn through the previous day's spike low. But let me point out that this is occurring on a holiday, with the currencies closing at noon Chicago time, so just as things start to get interesting, we're running out of time.I did not add the Sliding Parallel until after the close, because I had no interest in opening a trade with only a few bars left to trade in the day. But remember I had filed away in my head my interest to get long as price approached the area formed by a Sliding Parallel through the spike low of the prior day--Alas, with the day's end so near, the risk reward was unacceptable and we mark it down as interesting and move on. We'll see what price does tomorrow. Perhaps I'll get a chance to enter a low risk long position on the open: |
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So much for getting long at a test of the Sliding Parallel!!! As you can see, price gapped open much higher, above the up sloping Lower Median Line Parallel, the up sloping lower Inside Sliding Parallel and the down sloping Re-Action Line! That's quite an expenditure of energy in one single leap! If the Center Line and the Action/Reaction Lines are of any value at all, price SHOULD have expended its energy on this gap higher, but simply selling the opening price up here has no risk reward value, and in fact, if you look at thousands of these set ups [as I have], there are much better ways to improve the probability of success: Wait for price to show you it has turned and then look for a proven set up. You might miss a few ticks, but the probability of success will be higher and you'll be able to identify a logical stop loss to trade against. Note that price has one bar above the Re-Action Line and Inside Sliding Parallel but then heads lower and closes below both. To me, this is our sign that price has spent its potential energy to the upside. And more important, it leaves me with a potential trade set up that has a measured stop loss built in, with acceptable risk reward parameters. Take a look at the next chart and you'll see the trade set up parameters:
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| IF price climbs back up to re-test the confluence area of the Zoomed Re-Action Line and Zoomed Sliding Parallel, we want to get short. Note that this is literally a "failed" zoom trade, because price immediately traded back below the zoomed pair of lines--and we'll treat these now as having been "zoomed" again from the upside. We want to sell at the intersection of price with the area of confluence and that comes in at 8145. Our initial stop on the trade will be three ticks above the high of the day. The high was 8153, so our initial stop will be 8157. And our Logical Profit Target will be a re-test of the Lower MLH, which comes in at roughly 8115. IF price gives us the entry, we'll be risking twelve ticks to gain a potential 30 ticks. With the high success rate of this type of trade and the greater than 2:1 risk reward, this is a nice trade set up. Let's see if price allows us to get short: |
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| Price does climb back to and above the confluence areas but makes no headway to the upside, another sign that it is probably out of energy. We are short at our price of 8145 and so far, our initial stop has not been threatened. Several bars later, price closes below the Re-Action Line and during the next bar, begins to accelerate to the down side. Although I don't show it on this chart, as that second bar closes below the Re-Action Line, I snug my stop to "break even" because price has now closed below the Re-Action Line AND the confluence of resistance for two consecutive bars [and at the close of this last bar, we have a good amount of our anticipated profit in the trade, so letting it turn into a loss makes little or no sense]. Let's see where price heads now: |
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As you can see, price hits our profit target the very next bar. I immediately call my broker and cancel my stop order and make certain he agrees I am flat. As I have stated again and again, I make him repeat to me: "You're flat and working nothing." If you're using an electronic entry platform, check your orders and position and then make a habit of saying it out loud to yourself. It may sound silly, but the habit will be one that saves you many errors in your trading career.
I'm not going to post more of the presentation here, but I will give you a peek at what action this set of Action/Reaction Lines caught in numerous trade set ups over a handful of days [and these are detailed in the presentation]. Here's a look forward, so you can see how price "respected" these Action/Reaction Lines and their Parallels over the next four or five days:
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As you can see, these simple lines are very powerful. There were many very accurate trade set ups generated by these lines in a handful of days. Action/Reaction Lines are a little understood set of tools that share most of the rules of Median Lines. I hope this look at a portion of the presentation Action/Reaction Lines has been both interesting and informative. I wish you all good trading!
Act, don't Re-act! |
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