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Market Commentary for September 29, 2005: Today was a very profitable day for the traders that paid attention to the area of opposing lines of force I marked before the opening on the seminar forum, which came in at the 656.60 level. There was quite a bit of news out before the market opened. And once the market reacted to the news in the first few bars after the opening, it was important to wait for the trade to "set up," which in this case meant that not only did price need to get to the 656.60 area, but because the trade set up was dictated by what price did when it neared the crossing of opposing lines of force--meaning one line that was up sloping and one line that was down sloping--It was important to wait for "time" to bring price "to" the area of the opposing lines of force. Why?
In the seminars, I teach this trade set up as a "test and re-test" of an area of confluence and it's what price does once it reaches the area of confluence that tells you whether you want to get long or short! So until you see both price and time set up at this area, you don't have the likely direction of the trade. For floor traders making the transition and many traders that are used to being more active, it's often difficult to wait for "price to play its hand," but that waiting and seeing what price does once it reaches the area of confluence is what gives this trade set up such a high probability of success [I find that this trade set up, in my own actual trades, has a probability of success of well over 75 percent]. So there's nothing to do until enough time has passed to bring price TO the area of confluence. And IF there is going to be a high probability trade in that area, it happens because price interacts with the area of confluence. This means that you are waiting for both price and time to align, and you simply must wait.
Once price began to approach the area of opposing lines of force, it became clear that a trade set up from the long side was developing. The trade was simple, for the traders that waited: Buy a test of the area of confluence--as time brought price into the area of confluence--at 656.60, with an initial stop 7 ticks below the prior 655 swing low, which gave me an initial stop of 654.30.
The profit target on the trade could have been either a test of the up sloping blue Median Line [which ended up coming in at the 665 area by the time price and time met the Median Line] OR you could have chosen to wait for a re-test of the prior swing high at 665.90, which is how I diagrammed out the trade before entering orders and how I played out the trade. Both profit targets would have been very profitable and either would have been more than acceptable. As I diagrammed out the trade prior to entering orders, the risk reward ratio was just a touch above 4:1, which is very nice. The slightly lower profit target have would made little difference in this ratio...Let's see how the trade played out: |
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Once time and price entered the area of confluence, I had no problem getting long at 656.60. Once I had confirmation that my limit buy orders were filled, I checked that my initial stop loss order at 654.30 was still being worked and then I entered my profit order at 665.90.
About 90 minutes later, price left a nice swing low at 659.50 and once price headed back higher and made a new high for the move, I snugged my stop order to 7 ticks below this new swing low, which gave me a profit stop order at 658.80. Now I'm playing with the market's money, and that's always a good thing!
Once prices began to climb again, they literally went "vertical," filling my profit order several bars later for a nice $930 profit per contract, which is a very nice day's work, on or off the floor. Obviously, I could have squeezed out several more Russell handles in profits but the test of the prior swing high seemed to make good sense to me and we're just now beginning to see the market ranges expand after a long summer of smaller ranges, so being greedy made little sense after so nice a run.
I hope this was an interesting example. The success of the trade relied on waiting for time to bring price into the area of opposing lines of force--and that required first correctly identifying the area of confluence and then waiting for time and price to set up together. And again, patience is often in short supply with many traders, so if that rings a bell in your own trading, try writing out your trading plan before the day starts and then make it a habit to evaluate whether you stuck with your 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 them 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. I wish you all good trading!
Tim Morge |
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