Market Commentary: October 1, 2005: This weekend I want to give you all a peek into why I continue to offer free forums, host free web sites, and give seminars and webinars: The interaction with other traders is priceless, and whether I am talking with someone just starting out or a market veteran of 40+ years, I generally take something away from the conversation.
About three weeks ago, it was my pleasure to have a trader take my seminar at the CME that has been a floor trader for well over 30 years. When I first became a professional currency trader for a bank in Chicago, this gentleman was a very large force in the currency markets, though people outside of Chicago probably had little knowledge of him, since the IMM [what we now call the CME] was well under the radar in those days. But back then, when my floor broker called me and told me that this gentleman was buying Canada or Deutsche Marks or selling Swiss Francs, I learned quickly to pay attention. And later, as I became a “size” trader on my own, I had days where he was buying and I was selling—And neither wanted to budge! These days will always stick out on my mind.
And so it was with some nervousness and a little pride that I started my seminar that day and as my presentation went on, I did my best to forget he was one of the people in attendance, so that I covered all the materials as I normally do, to be fair to all the other people attending that day. Since the day of that seminar, I’ve been a regular visitor to his office, at his invitation, and he is now using Autoforks software as part of his daily approach to the markets.
One day several weeks ago, he asked what markets I regularly follow for seminar attendees on the seminar forum. And he asked if I would post the CME Canadian Dollar chart, along with the dominant pitchforks and their settings for Autoforks, because he felt a 15 percent or more move was setting up. I assured him I’d begin putting the chart and the software settings up every morning, which I’ve been doing ever since. He didn’t tell me which way he thought it was going—and perhaps he was “spoofing me” to see if I’d put it up for him. But I have a long history of trading Canada, so I already had a great deal of chart work done and it was little work to begin adding it to the daily seminar forum posts.
At first, nothing much seemed to be setting up. There was movement, to be sure; In fact, price rallied three cents [300 IMM points] the week he asked me about it, but prices failed to make it above a regional major swing high, so it wasn’t clear if he was expecting a 15 percent move higher or lower. But several days ago, I posted a very interesting pre-opening chart on the seminar forums, and here it is: |
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When I work with seminar attendees, I try to get them to learn the higher-probability trade entries first, because they show up regularly but not quite as frequently as some of the other entry techniques I use when trading with Median Lines—mainly because several conditions must be met for the higher probability trade set ups to be “in play.” In this case, price was in an up trend. And I had drawn in a Modified Schiff Median Line that was gently down sloping. When I looked carefully at the chart, I noticed that if I measured the amount of directional energy price spent going from the last swing high at 8580 to the last swing low at 8495, a move of 85 points, and then projected that same size of movement from the just-made swing high at 8571, I got a projected swing low of 8487. And looking at the down sloping Schiff Median Line’s Lower Parallel, I saw that IF price spent that same amount of downward directional energy, price should run out of energy at the confluence of the Lower Schiff Median Line Parallel and the 100 percent directional energy projection, right at 8487. This area of confluence should be a high probability area to try a long position, if price gave me the opportunity.
I generally use fifteen tick stop loss orders in the Canadian Dollar and in this case, if price ran through this area of confluence by more than ten points, I’d no longer have confidence that this trade had any merit, so the size of my stop made sense. And so I worked an order to get long Canadian Dollars at 8490, 3 ticks above the projected confluence, with a stop 15 ticks lower, at 8475. And although I generally have an upside profit target [because I generally day-trade], IF this trade was successful, I planned to hold it overnight and run 24 hour GTC [Good until cancelled] orders with Spike’s order desk. But should I get a ten to fifteen percent upside run and catch a good portion of it, I’ll only be risking 15 ticks, which is my standard day trading stop loss amount—so in this particular trade I know the risk reward ratio is MUCH greater than my minimally acceptable 2:1 by any measure. |
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| Price came down and tested the Lower Schiff Median Line Parallel, getting me long at 8490 in the process, and then turned higher. Once I saw my entry price print, I double-checked my electronic trading platform’s audit trail to be certain I had exchange confirmation of the fill on my limit buy order. And once that was done, I checked to make certain my stop loss order at 8475 was in the market and working. Since I am trying to work my way into a longer-term trade, there is no upside profit target sell order for me enter at this point, so I simply monitor price as the day goes on. I note that price makes one more stab lower later in the day to test the Lower Schiff Median Line Parallel, leaving a double bottom at 8486 in the process, and then slowly begins to head higher. |
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| The next day, price touches the Schiff Median Line but then sells off in a wide range bar lower, moving below the 8486 double bottoms as it makes a new low of 8481. I’m not stopped out yet, but it feels like I am just about to watch the trade turn into smoke in front of my eyes. |
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| Just as I am certain I will get stopped out, price turns higher, leaving new double bottoms at 8481. And two bars later, price has sprinted above the down sloping Schiff Median Line. As soon as price moves above and closes above the Schiff Median Line, I draw in a new “traditional” Median Line, from pivots B-C-D. IF price has indeed made a significant bottom and is now heading higher, this new Median Line should give me the general direction and slope of the new trend. Again, because I am longer-term trading, I am working no profit targets yet and I don’t yet see a formation that I feel I can “hide” my stops behind—more about that later. |
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| Price moves in a narrow range the rest of the day, but doesn’t pull back from its spike high well above the red down sloping Schiff Median Line. And early the next day, price tests the red down sloping Upper Median Line Parallel. At the moment, it would appear that price has put in a significant bottom and I may have entered at a low-risk area with a very inexpensive stop loss , but only time will tell if the recent swing low will hold up. |
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| Price then breaks out of the consolidation or Energy Coil to the down side, heading lower and testing the red down sloping Schiff Median Line. In one price bar, half my potential profits have disappeared and I wonder to myself if price will stop at the blue up sloping Lower Median Line Parallel, where Median Line theory tells me price SHOULD run out of down side directional energy. |
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In fact, price runs out of down side directional energy at the Schiff Median Line and doesn’t get a chance to test the blue up sloping Lower Median Line Parallel before it turns up hard. In fact, price makes a new high for the move the very next bar, and the next bar closes above the red Upper Schiff Median Line Parallel. Price finishes out the day with a small pull back, trading right around the Upper Schiff Median Line Parallel.
Early the next day, price trades lower again, breaking below the Upper Schiff Median Line Parallel but failing to close below it during two consecutive wide range bars. These bars not only close above the Upper Median Line Parallel, they also leave double bottoms at 8537, and I marked them on my chart as a potential significant low, but some time must pass before I can say that with any certainty. |
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Price climbs higher the rest of the day, eventually breaking and closing above the blue up sloping Median Line. It closes near its highs for the week and as the day comes near an end, I cancel my initial stop loss order at 8475 and move it higher to 5 ticks below the 8537 double bottoms price made earlier in the day. If you look at the closing chart carefully, you’ll see that a move below these double bottoms would also be a move below the confluence formed by the Upper Schiff Median Line Parallel and the blue up sloping Lower Median Line Parallel. Price SHOULD run out of down side directional energy at or before this area and if it doesn’t, I prefer to be stopped out with a nice profit. Then I can take a step back and re-evaluate the market. Remember: I can always look for a new entry!
For those of you that have asked for some entry set ups other than test and re-tests or zoom and re-tests, this is what I call a “line” trade, which means I bought at an area where price would be testing a Median Line or one of its parallels, without the benefit of the “re-test” to help filter out the potential acceleration of price through the line I am trying to buy against. But the directional energy measurement I diagrammed out in the first image gave me more confidence that this area would hold or contain any down side movement. And most important, if I was wrong, I was working a stop of 15 ticks, which is $150 per contract in the Canadian Dollar. This is my normal day trading stop in this currency, so it is more than acceptable in this case because I am looking for a larger move over multiple days or even weeks.
This type of "stalking" a trade can be used in stocks or any of the commodities and or currencies. My one caveat would be this: NEVER turn a day-trading position into an overnight position UNLESS this was your original plan. Even should the trade then work out, you would be starting down the slippery slope of deviating from your trading plan and that is very difficult to recover from. It can devastate a trader! Always stick with your plan. |
I hope this was an interesting example. I always suggest traders try writing out their trading plan before the day starts and then make it a habit to evaluate whether they stuck with their plan as the day unfolded. For any of you interested, I'll be more than glad to send you a copy of the trade plan work sheet I pass out to all the floor traders that take the seminars--you might find it useful in your own trading. If you'd like a copy in excel format, just drop me an email at:
Email me at: tmorge@spiketrading.com
and ask me for a copy of the trade set up sheet. And if you get a copy and have any suggestions, please email me back with them. I'm always trying to improve the trading tools I use, both in my own trading and when I teach other traders how to improve their trading.
One last thing: More than a few of you have now emailed me in the past few days asking specific questions about the seminars and mentoring sessions. I have a list of all of you that have asked and I will be sending each of you, individually, answers to your questions--but I cannot give you concrete answers until we make one last crucial test on the software we plan to use for on-line seminars and mentoring, and for most of you, I am going to suggest you'll get just as much out of the seminars by attending them via a secure internet connection that will will allow you to ask all the questions you want, real-time, and also allow me to draw specific examples in response to all of your questions. This way, you won't have spend time and money travelling to Chicago, at least for a seminar. When we offer multi-day advanced seminars, it may make more sense to plan a trip. But that's up to each of you to decide. In any event, look for private emails from me in the next few days.
Have a great weekend! I wish you all good trading!
Tim Morge |
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