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May 12, 2005 Comments: Before the opening, I was looking at the E*Mini Russell 15 minute chart, above, carefully. There is a *ton* of confluence forming overhead resistance between 598-600. The rally out of the hole yesterday may have put price in position to test the red down sloping Median Line Parallel and if that's the case, price will be testing all of this confluence. First there's the double tops at 599.80--Those are easy to identify. And then, if you measure the Directional Energy price spent in the last two up swings--that is, how far did price move in one direction, bottom to top, in the prior two upward moves--You'll see that in the first swing, price moved 10 E*Mini Russell points higher and in the second swing, price moved 9 1/2 E*Mini Russell points higher. By taking those two distances and adding them to the current low, at point E, you can see that if price uses the same amount of Directional Energy in this same move higher, this move should end somewhere between 597.60 and 598.10. Here's how I calculated the 100 Percent Directional Energy Measurements for the two prior up swings:
The low at A was 591.00
The high at B was 601.00
Subtracting the low at A from the high at B gives me the total directional Energy spent traveling from A to B, which was 10 E*Mini Russell Points
The low at C was 594.00
The high at D was 603.50
Subtracting the low at C from the high at D gives me the total directional Energy spent traveling from C to D, which was 9 1/2 E*Mini Russell Points.
The low at point E was 588.10, so if price expends 100 percent of the Energy moving higher from E as it did when it moved from A to B, it should run out of Energy at 598.10. And if it spends 100 percent of the Energy moving higher from E as it did when it moved from C to D, it should run out of Energy at 597.60. Now let's see how the market opens: |
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Price gaps open higher and then climbs higher, testing the red down sloping Upper Median Line Parallel and both the 100 Percent Directional Energy Projections. Once price reaches the area of confluence, it sells off, closing about where it opened and in the lower third of its range.
Before someone asks the question, "Why didn't you just work an order to get short, before the market opened, at the area of confluence?"
The short answer is that with *that* much confluence, there's nothing wrong with working an order from the opening bell, as long as you also have a stop order in place and have identified a Logical Profit Target that gives you a solid risk reward ratio. However, I have seen over and over again in my testing of actual trades that by waiting to place my orders at a test of a Median Line or Upper/Lower Median Line until the first bar has tested and closed, I generally miss the losing trades where price hits the area and *zooms* through it, accelerating instead of stopping and reversing at the "most probable" line.
Now that I've seen how price reacted at the area of confluence and at the Upper Median Line Parallel, let me see if I can diagram a set of orders that will give me a solid risk reward ratio: |
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| I want to get short at a re-test of the Upper Median Line Parallel, which is confluent with the 100 Percent Directional Energy Projections from A:B and C:D, so my limit sell order is at 598.10. My initial stop loss order will be three ticks above the 599.80 double tops at 600.10. And "eye balling" where price will intersect with the down sloping red Lower Median Line Parallel after a handful of bars, my profit target will be at 588. That gives me a risk reward ratio of just over 5, which is more than acceptable. I enter my limit sell order into the market and at the same time, I put my initial stop loss order in. Let's see what price does now: |
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| Price throws me a bit of a curve ball and spikes lower, closing near its lows and I wonder if I'll get a chance to get short near the confluence area! But the next bar is the exact opposite of the spike bar lower, a mirror bar, that spikes back up and closes near its high. The market is apparently as nervous as I am, but I have my plan and I'll go with the plan. Let's see what develops: |
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| Price opens unchanged and then spikes higher, testing the Upper Median Line Parallel and in the process, getting me short at 598.10, but then as fast as it climbed higher, it turns back lower and closes near its lows. These are classic signs that price has has likely expended its Directional Energy at the 598 area. Once I get confirmation that my limit sell order at 598.10 was filled, I put in my profit order at 588. |
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| Price actually tests the Upper Median Line Parallel again, and again, it turns back down hard off the area of confluence and the wide range bar closes near its low--in fact, this bar is an outside bar lower, because it had a higher high than the prior bar and a lower low than the prior bar and it closed lower than the prior bar. And that's generally a good sign if you are short. That's also the third fifteen minute bar that has tested the Upper Median Line Parallel and failed, so I'd like to see price make some progress to the down side soon, please... |
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Price makes more progress to the down side--finally! Price tests the red down sloping Median Line, which is one of its "most probable" lines to the down side, so even though I am not using the Median Line as a profit target or even a partial profit target [though YOU could use the Median Line as an area to take profits or partial profits if the risk reward ratio works for you, or if you are scaling in and out of positions], the fact that price has now tested the Median Line makes me re-evaluate just where I am in my trading plan and how much risk I have "on the table."
Why? It's possible that price may have expended its down side energy at the test of the Median Line and if that's the case, do I still want to be working my initial stop loss order or can I snug it closer to the current price action without being caught up in the noise?
After a quick look at the chart, I decide to move my stop to *four* ticks above the 598.70 high of the day, to 599.10, because I want my stop loss order to be one tick above the even number 599. It may not matter, but it sometimes keep me in the market when floor traders are just running stops, so to me, it's worth the extra tick for peace of mind. I cancel and replace my stop loss order. Now let's see what price does: |
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| Price spends the next seven bars forming an erratic Energy Coil, but that isn't surprising with all the wide range bars we have seen today. Looking at the chart, I don't feel comfortable moving my stop order closer to the action yet, so I'll just have to wait for a better clue from price when it comes out of the Energy Coil: |
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Price breaks below the Energy Coil by making a wide bar lower and price moves below the Median Line and also closes below it. Once this wide bar closes, I snug my stop loss order down to three ticks above the top of the 596.40 Energy Coil price just broke out of, which is also a swing high now. That makes my profit stop 596.70, so I am now playing with the market's money--always a good thing.
The next three bars are narrow range bars, which make me pay attention, because price is coiling again, or re-storing energy. If I hadn't already moved my stop to just above the swing high, I'd be snugging it up after seeing these three narrow range bars form. The one saving grace of these three bars is that they all close below the red down sloping Median Line. Since I've already snugged my stop order, there's nothing to do here but stay with the plan and watch for further clues from price: |
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Price spikes lower with a wide range bar, making a new low for the day, and when this wide range lower bar closes, I snug my stop profit order again to three ticks above the 593.50 low of the Energy Coil, which is also an area well above the Median Line, to 593.80. If price has enough energy to get back above the bottom of the Energy Coil AND back above the red down sloping Median Line, I'd prefer to get profit stopped out.
The next bar also makes a new low for the day but it is a narrow range bar. If I hadn't already just snugged my stop profit order closer to the action, I would do so now, because the narrow range tells me price may be running low on directional energy. |
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The next bar starts out making me uncomfortable, spiking higher, but then it spikes lower and closes lower on its lows. Remember, that makes it an outside bar lower, meaning the high was higher than prior bar's high and the low was lower than the prior bar's low and this bar closed lower than the prior bar. And remember that this type of bar generally bodes well for further down side action.
The next bar is also a wide range bar and it moves to and through the red down sloping Lower Median Line Parallel, filling me on my Profit Target at 588 as it does so. Once I confirm that I was filled on my profit order, I cancel my stop profit order.
This trade netted a nice $1010 per contract, which is a nice day's work. I liked the use of the prior two swings higher to measure the prior Directional Energy expended to the up side to confirm the re-test of the Upper Median Line Parallel as an area where price would likely run out of directional energy.
I hope you found this trade interesting and informative. And I wish you all good trading!
Act, don't Re-act! |
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