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January 5, 2005

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January 5, 2005 Comments: Euro FX futures have been trading lower since hitting a new contract high on 12/30 and I have been looking for a low-risk entry area to initiate both an intra-day and overnight short position. We have one open gap above the market and another that was barely filled, so this has been a strong down trend. I don't expect it to end with a "V" bottom; Instead, I expect a series of waterfall-like sell-offs until everyone gets their chance to get short...

The traditional Median Line on this fifteen minute chart has done a good job describing price during this run lower. Note the tests of both the Lower Median Line and the tests of the Median Line itself: Price interacted at these lines and bounced, which tells me this set of lines is tuned into the same frequency as this market. For a low-risk short entry, I calculate where price will hit the Upper Median Line and enter a limit order to go short at that price. I also enter a stop-loss order at the same time to limit my risk, in case the market begins to run higher.

Here's an important tip that may seem obvious, but is easily overlooked: On these short-term charts, the lines you are trading from are often at sharp angles, which means that the entry price changes as each bar updates. Make certain you know the slope of the line you are trading from and recalculate your entry price at the end of each bar and then change your entry order accordingly.

Mid-morning, I get filled on my order to sell Euro FX futures at 133.10 and I immediately double check that my 133.25 stop-loss order is still in place and being worked. Note that I do not have a Fib number to use as confluence with the Upper Median Line sell in this example. But I still liked the entry because the Median Line had been doing such a good job describing price and also because there is an old-timers bit of currency lore running around inside my head: Although most traders think futures prices tend to respect the "big handle" numbers, as in "135.00 and 136.00," currencies tend to gravitate towards 80 and 20, as in "132.80 and 133.20" for support and resistance. Why? It has to do with the "old days," when we were bank cash traders and made quotes to each other over first teletypes and then telephones. Prices were often quoted wide and those two areas became ingrained as places where support and resistance would show up, instead of the more obvious "big handle" areas. But I digress...

I am now short at 133.10 and I am working a stop-loss at 1.3325. Where do I want to look for profits in this situation? The morning low was at 132.22 and the high was at 133.12. The 50 percent retracement of the day is 132.67, so I enter a profit order at 132.70 for the intra-day portion of the position. That gives me a very nice risk/reward ratio on the trade and because I know that these particular types of Median Line setups have a success ratio above 75 percent in my own trading, this is a trade well worth waiting for in my book!

Late in the afternoon session, my profit target is hit at 132.70 and I then cancel my stop-loss orders for the intra-day portion of the trade and check out with my broker to make certain my trade fills, both price and quantity, match what he has for me. For the overnight half of the position, I'll take a profit if prices test the Median Line on the downside, which comes in at roughly 131.70 on the open tomorrow morning, because I expect a series of waterfall moves down, and there should be other high-probability areas to get short again IF my profit target is met on this particular trade. My pre-opening order for tomorrow morning [Thursday, January 6th] is to take profits on my short position at 131.75 on a limit basis, and once the market opens, if I haven't been stopped out or if my profit order hasn't been hit, I'll snug down my stop-loss order to protect profits.

Act, don't Re-act!

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