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May 10, 2005 Comments: Sometimes you have to take a simple trade when you see it. In fact, take them every time you see them. We've spent a lot of time recently here talking about some of the more arcane rules associated with Dr. Andrews' Original Action-Reaction Course and the simple trades sort of got swept under the carpet because I was very busy trying to carefully define some of those concepts and some of the trade set ups that are built around those concepts. But here's a very simply trade from last week that is nothing more than a test of a Median Line, followed by a test of overhead resistance. They don't get much easier than that.
The stock indices in general had been moving lower for four or five sessions and just couldn't seem to find any buyers. But the Russell 2000 finally had a nice rally after that prolonged sell off and looking at the chart before the opening, I noticed that price had traded between the red down sloping Upper Median Line Parallel and the red Median Line all the way down. And although price briefly peeked below the Median Line, yesterday, it closed back above the red Upper Median Line Parallel on the day.
This made me a little friendly to the upside, but staring right at me were two overhead lines of resistance: a set of multiple tops at 586 and a set of multiple bottoms at 588. But looking at the chart, that stills leaves a good six points to work with, which in the E*Mini Russells is $600 per contract--not exactly chicken feed if you can find a way to pick it up. Because I can see support below the market and two levels of overhead resistance above it, I draw in a green nearly flat Median Line set, with a slope that I *think* will likely match the day's action. Let's see how the market opens:
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Price gaps open higher, about in the middle of the range I am interested in capturing, so at least for now, my original idea is shot in the foot. I'll have to watch for another opportunity or wait for a new idea, because right now, price is trading right in the middle of the range I identified before the opening. A little patience, anyone?
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After three strong up side bars, price tests the first area of overhead resistance, at 1186. And as I thought before the opening, price runs out of directional energy at this area and turns lower. But when it changes direction, it drifts lower...About sixteen bars after testing the overhead resistance, it finally does something that makes me sit up and take notice: Price fills the opening gap and tests the green nearly flat Median Line. Now I see something I think I can work with. It's an easy trade set up and the risk is very defined. Let me diagram it:
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Oh, wait! First things first!!! Why didn't I just have a buy order sitting at the green Median Line? Remember what can happen when price approaches any of these important lines: At these lines, one of three things will happen: 1) Price will turn or 2) Price will form an Energy Coil or 3) Price will accelerate and Zoom through.
I said last week: "DR. Andrews said price will reach these lines 80 percent of the time, and as I have stated many times and showed in my first book, after doing statistical research, that statement is correct. But reaching the line and turning at the line is NOT the same thing.I have found that by being more selective--in this case, waiting for the test of the area and then laying out the orders once I can measure risk--I miss most of those "buying or selling in front of the zooming train" trades now. Do I miss some entries that would have been very profitable? Absolutely. But my winning percentage is much higher and I find it much less wear and tear on *me*, which is very important, at least to me."
So here again, instead of simply standing in front of the train as it comes down towards a test of the Median Line, I let it make its test *first*, which allows me to first SEE if it slows as it tests the Median Line and also then allows me to see if the bar that tests the Median Line closes through the Median Line or closes back above the Median Line. Now that I've seen that first test bar close, I can lay out the logical orders, as I see them:
If price tests the green Median Line again, I want to get long at 580. If price lets me get long, my initial stop loss will be three ticks below the low of the day, which just happened when price tested the Median Line but then closed back above it. The initial stop will be at 578.80, so I'd be risking 1.2 E*Mini Russell points. And my Profit Target is a test of the first overhead resistance, which was tested once earlier today, at 586. The risk reward ratio on the trade is a very nice 5. The orders look good, so I put my entry order and initial stop loss order in the market.
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The next bar also tests the Median Line, getting me long at 580, before closing back above the Median Line again. As soon as I have confirmation of my fill, I check that my stop loss is still in the market and then I enter my profit order at 586. Now let's see what the market does from here:
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Price actually tests the Median Line once before before taking off with a wide range spike bar higher. After one more bar that closes higher, price comes back to try to form a wide range bar that tests the down side, but even this bar manages to close higher. But in the process of testing the down side, it leaves a mini-swing, which gives me a place to snug my stops, turning them into profit stops. My new stop profit order is now three ticks below this mini-swing low, at 580.90. I'm now playing with the market's money. The next bar moves higher again, and things seem to be progressing towards my profit target.
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As I said in the beginning of this post, this was going to be a simple trade. And indeed, two bars later, which also happens to be the second to the last bar of the day, price tests the overhead resistance at 586 and I am filled on my profit order. Once I get my sell confirmation at 586, I cancel my stop profit order. This trade netted a nice $600 per contract in a relatively quiet market. The key to the trade was setting out the parameters of what I was looking for and then having the patience to wait for the trade to develop. Forcing a trade wouldn't have worked here and it seldom works in any market. Identify your edge and wait for it to show up. If it does, take your swing. If it doesn't, there will always be other trade set ups.
I hope you all find this trade example both interesting and informative. And of course, I wish you all good trading!
Act, don't Re-act!
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