Jan. 10, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_jan102005a.gifClick To Enlarge
http://www.medianline.com/images/jan102005a.gif
January 10, 2005 Comments: In contrast to Friday's trading, today was a day when all the planning done before hand was discarded when the opening tick came out...Now, there are some of you out there that read these trade set ups carefully and wonder at how many quality trade set ups I show case. Some of you must have scratched your heads and said, "Aren't there days when NOTHING works?" Well, the answer is...yes, there are those days. Especially if you only follow one market. But I'm going to showcase TWO markets I did extensive work on over the weekend, readying myself for a pair of big trades...and got zip. Zilch. Nada. Nothing!!! Wadda ya gonna do?
Looking at the Euro FX market first, I expected either a move lower to re-test Friday's lows *OR* a fast rise out of the hole and a test of the Upper Median Line Parallel, which would be an ideal sale area *IF* it coincided with a Fib retracement to give me some added confidence.
But instead, the market gapped open higher and then basically played dead for the first few hours. It didn't run high enough to get near a high probability sale area, nor did it retrace to an area I found appealing as a "buy" area. In hindsight, I could have been more enthused about buying a sell off that merely filled the gap at 130.82, but that trade location didn't thrill me. I passed on the trade. And by the time price had drifted enough to the right to test the Upper Median Line parallel, it was not high enough to be near a meaningful Fib retracement to add confluence. In short, no Energy Points in this market...Just a bunch of Energy Coiling going on, which isn't that unusual after such a nice move lower all of last week.
Now Let's switch to the Canadian Dollar:
http://www.medianline.com/images/550_jan102005b.gifClick To Enlarge
http://www.medianline.com/images/jan102005b.gif
This first chart is a 60 minute chart of the Canadian Dollar. I was pondering buying a pullback to the Lower Median Line Parallel , because of the nice base formed to the left of this up sloping Median Line formation. If price moved lower on Monday morning, I'd monitor this set up and act accordingly. But of course, price gapped higher, so this idea never came into play.
But here's a different look at the Canadian Dollar, with a potential Energy Point sell area at roughly 8140, at the confluence of an up sloping Median Line, a down sloping Upper Median Line and an up sloping Lower Median Line :
http://www.medianline.com/images/550_jan102005c.gifClick To Enlarge
http://www.medianline.com/images/jan102005c.gif
You can see that price gapped above the Energy Point and never looked back. The only potential trade location came later in the day, when you mighthave considered selling the test of the Upper Median Line Parallel--but to be honest, I had packed it in by then and gone Pirate Ship Painting .
And so the moral of the story is...there are boring days, days when the work doesn't immediately translate into trades. But I don't push it. If the trade isn't what I was looking for, I don't go out looking for a trade just for the sake of a trade. That generally spells L-O-S-S.
I wish all of you a good trading day tomorrow!
Act, don't Re-act!
Jan. 27, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_jan272005.gifClick To Enlarge
http://www.medianline.com/images/jan272005.gif
January 27, 2005 Morning Comments: I saw a gorgeous trade set up while doing my pre-market work this morning, and I thought I'd highlight it here today. Let's review yesterday's action: Prices gapped higher and ran past the down sloping red Upper Median Line Parallel on the opening bar. They never retraced back lower to give you a low risk long entry point at the retest of the "zoom," so if you wanted in, you had to jump on and hope for the best . The first objective for price to the upside was highest gap filler line at roughly 1.3070, which price touched on the third bar. Then price pulled back a little before steadily climbing higher to finally test the red First Warning Line as well as the prior swing high, right at 1.3110. That ended up being the extent of the run higher yesterday, and prices slowly sold off the rest of the day.
Now for today's pre-market set up and how it played out: Prices were trading quite a bit lower before the Thursday morning futures opening, in an area that would be near a test of the confluence Energy Point formed by the blue up sloping Lower Median Line Parallel and the 50 percent retracement of the A-B swing measurement. I measured the Lower Median Line Parallel at 1.3028 and because price failed to make it high enough yesterday to test the blue up sloping Median Line, I felt the opening weakness would at least give me a test of the Lower Median Line Parallel. I put my order in to go long at the opening at 1.3023, with a stop ten ticks below that. As you can see, I wasn't aggressive enough to catch that early morning pop, but you could have easily caught this move by putting your order three ticks above the 50 percent swing retracement, using a three tick violation of the blue Lower Median Line parallel as your stop loss area.
Note that I extended the gap filler line from the past few days over to today's action. That line should serve as a warning area for you to lock in profits if you were aggressive enough to get long on the opening or at least snug up your stops! And as I finish writing this commentary, price is retracing back down to test the up sloping Lower Median Line, at the morning's lows, so this underlines the importance of solid trade and profit management!
I wish all of you a good trading day!
Act, don't Re-act!
[ 本帖最后由 hefeiddd 于 2008-4-19 09:51 编辑 ]
Jan. 28, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_jan282005.gifClick To Enlarge
January 28, 2005 Comments: Euro FX futures spent the second of half of Thursday in an Energy Coil, re-storing the energy expended in all the recent gapping formations. But with the 7:30 AM economic numbers, price shot out of the hole, quickly rocketing through the top of the coil and heading straight for a re-test of the Lower Median Line Parallel that price had drifted out of as time moved forward. This is a classic re-test sell area, and one I try to watch for, especially on spike moves.
Where you put your entry order is a matter of personal preference, but I always feel that with these re-tests, I want the market to get good and over extended, or I may find myself short and just watch while price bobs along just below the Lower Median Line Parallel, edging higher and higher until I get stopped out. So I always put my orders right at the Lower Median Line Parallel, not before the line--and I update the order at the end of each bar, so that the order is always "fresh" and at the level where price would intersect with the Lower Median Line Parallel. In this case, price nearly touched the Lower MLH twice, before finally tagging it and getting me short at 1.3086.
The intial stop on the trade was 1.3106 OR two consecutive bar closes above the Lower Median Line Parallel. If price hung around up here that long, I'd look to scratch the trade or minimize the damage as soon as the second close above the bar was happening.
How did it play out? Here's the second chart, with the updated price action:
http://www.medianline.com/images/550_jan282005b.gifClick To Enlarge
Profit targets? Well, these are personal preferences, and you can always snug stops as you gain profits in the trades and watch how the trade unfolds to the downside. The first and most obvious area to take profit would be the bottom of the Energy Coil price tested on the opening bar . But looking at the chart, it seemed to me that price had tried twice to climb above two key resistance areas, the red First Warning Line several days ago and now the re-test of thge Lower Median Line Parallel, so I felt the downside might have a bit of a nice run in it. I liked the thought that price might blow through the bottom of the coil and try to test the larger time frame Lower Median Line Parallel. And that's an area that I'd use my "three tick rule," meaning at the start of each new bar, I measure the price of the intersection and then move the profit order to three ticks above the up sloping Median Line Parallel .
One last note before I finish describing the action: If you're short as price re-enters an Energy Coil from above and IF price makes any significant headway towards or past the mid-point of the Energy Coil, immediately snug your stops up to three ticks above the top of the Energy Coil that price just busted down below. If price has the strength to climb right back out of that Energy Coil area, you no longer want to be short. At best, price will consolidate...OR it may have had its run to the downside and found "new legs."Protect yourself when these sign posts present themselves and you'll save yourself lots of hard fought for profits.
As price came down through the Energy Coil, the action was so fast, I was tempted to hold off putting in my profit order three ticks above the Lower Median Line Parallel. But remember: "Have a plan and trade your plan!" I entered my order at 1.3011 and I was filled easily as price ran through the bottom of the Energy Coil . Taking profits as price seemed so very weak is often difficult, but remember, you want to be taking profits as the last group are selling into the action--not scrambling for the door along with the crowd!
This was a nice classic trade set up that played out according to the plan and its well worth studying it carefully and wondering how you would have traded this set up.
I wish all of you a good trading day!
Act, don't Re-act!
[ 本帖最后由 hefeiddd 于 2008-4-19 09:59 编辑 ]
Jan. 31, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_jan312005.gifClick To Enlarge
January 31, 2005 Comments: Euro FX futures were dead yesterday, so there's little to write about or show in that futures contract. I *did* have a "watch me" area that hit yesterday in the Canadian Dollar that spawned a nice trade, and it's a trade set up I love but don't get that many chances to show on these pages. The simple idea is that there are moves that are "trendy" in nature, but don't unfold fast enough for the majority of folks to catch. In fact, what generally happens is that in a down sloping rolling chop, people tend to get short at new lows and then quickly get stopped out as the locals squeeze them for a few hours or days, and then the move lower gently continues lower. The chart above illustrates just such a move. It never "runs" lower for days and days , so most traders don't get the satisfaction they are looking for before their short position gets stopped out. I'll show you how to take advantage of this formation, using day only set ups, and all it requires is patience and the foresight to set your stops and profit targets once your entry is hit . Here's the trade set up chart, zoomed in to illustrate the trade zone a bit better:
http://www.medianline.com/images/550_jan312005b.gifClick To Enlarge
Now I don't trade or watch the Canadian Dollar every day. So I put in "watch zones" with my floor broker before each opening, areas where he'll call me and talert me if price gets there. You can usually set these on your charting software as well, so if your broker doesn't offer you that service, you can try a software solution. Or simply have resting orders in the market at these key levels before each opening and update the orders every few bars. Now on to the trade description:
Again, the idea is that we are in a rolling chop lower and that we want to sell a covering rally, where the people that "sold in the hole" are scrambling for the doors. Looking at the first chart, you can see that has happened time after time in this move lower. You could have caught a handful of these moves by drawing an inside sliding parallel and selling rallies to it, in the same manner that I am about to use to sell the rally to the Upper Median Line Parallel.
I calculate where price will intersect with the down sloping Upper Median Line and at the close of each bar, I enter an order three ticks below this intersection point. Since there is no confluence with Fib reatracements or other Median Lines, it isn't a classic Energy Point, just a sell set up at a down sloping Upper Median Line Parallel. I finally get filled mid-morning and I am short at 8086. I set my initial stop at 8106, twenty ticks higher. I would also close out the trade if price closed above the down sloping Upper Median Line Parallel for two consecutive bars, even if my stop hadn't been hit, because If it hangs around TOO long up here, the trade probability goes down dramatically.
The Logical Profit Target is at the three bottoms at the 8053-55 area. Once I am filled on my sell entry, I put in my stop orders and my profit orders. I also make my profit order a MOC , meaning that if I am not stopped out or if my profit target is not met, my broker will get me out of this trade on or before the close. I have no intention of this turning into an overnight trade. Now let's see how the trade unfolds:
http://www.medianline.com/images/550_jan312005c.gifClick To Enlarge
Price heads lower as soon as it tests the down sloping Upper Median Line Parallel. My stops are never in danger. About five bars later, I notice price making a series of multiple tops at the 8078 area, so I watch that area closer. When three tops are left there and then price makes a nice bar lower, I snug my stop loss order down from 8106 to 8081, turning it into a stop profit order. I leave my profit order alone, though. I've made sure now the trade will be a winner and if this trade plays out like most rolling chop trades, it will continue to slide lower as more sellers are dragged back into the market by the lower and lower action .
It literally takes the rest of the day, and with about twenty minutes left to trade, I double check that my floor broker will make sure I am either filled on my profit order or he'll get me out on the close. But as the session is getting close to drawing to a close, the floor traders look for stops to the downside and push the futures to new lows and I get filled on my profit order at 8056 for a nice "rolling chop" order. Once I get filled on my profit order, I call my broker back and make certain *all* order are cancelled, especially the MOC buy portion and that he agrees I sold and bought an equal amount of contracts, meaning I am flat and working nothing
This is a gorgeous example of a "rolling chop" trade set up, one I perfected trading copper for years and years, where this is a very commom formation. Luckily, we were on the right side of the "chop" this time, which is a good thing!
I wish all of you a good trading day!
Act, don't Re-act!
Feb. 6, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_feb62005.gifClick To Enlarge
February 6, 2005 Comments: On Monday, I outlined a "rolling chop" trade set up and showed how it played out profitably, netting 30 ticks in the Canadian Dollar. The above chart illustrates Monday's trade, as a review. On Tuesday, I made a similar trade in the Canadian Dollar, using the same set up, and first I am going to show you the setup and how it played out. Then I'm going to share a very inciteful email from Laura, one of our Action-Reaction Lab Forum regulars, about Monday's trade that shed an interesting light on both Monday's and Tuesday's set up, and I'll go deeper into what I found when I went back and looked at literally hundreds of these "rolling chop" trades I've made over the years, making certain I knew the answer to her questions. But first, here's Tuesday's trade set up:
http://www.medianline.com/images/550_feb62005b.gifClick To Enlarge
Just like Monday, the idea is that we are in a rolling chop lower and that we want to sell a covering rally, where the people that "sold in the hole" are scrambling for the doors. You can see that has happened time after time in this move lower. You could have caught a handful of these moves by drawing an inside sliding parallel and selling rallies to it, in the same manner that I am about to use to sell the rally to the Upper Median Line Parallel, just as I did yesterday .
I calculate where price will intersect with the down sloping Upper Median Line and at the close of each bar, I enter an order at this intersection point. Since there is no confluence with Fib reatracements or other Median Lines, it isn't a classic Energy Point, just a sell set up at a down sloping Upper Median Line Parallel. I enter an order to go short Canadian Dollar futures at 8068 and if I get filled, I'll set my initial stop at 8083, fifteen ticks higher. This is several ticks above a triple top to the "left" of the current price action, and if price has the strength to move above the Upper Median Line, as well as the resistance formed by these three tops, I just plain want out.
The Logical Profit Target is near the test of the morning's lows at 8043, which would be a profit of twenty five ticks. There are multiple bottoms at this area and IF price climbs high enough to get me into this trade, it's already near lunch time, so I won't have too long to ride the trade. And like Monday, this is a Day Only trade, and I will enter a MOC stop order IF price rallies enough to get me into this position. Now let's see how the action plays out:
http://www.medianline.com/images/550_feb62005c.gifClick To Enlarge
As you can see, price begins to climb higher and I get into my short position just as the rocket takes off, so to speak. I never had more than two ticks profit in the trade, and though I could have briefly scratched the trade, I was soon stopped out at my price at 8083. I caught a nice 30 ticks profit on Monday, trading the "rolling chop" and Tuesday, I got chopped and gave back fifteen ticks. Again, losing trades can be as informative as winning trades, especially if you take the time to look at why the trade failed. Obviously, some trades just are going to be losers. Many traders make a great living with 35-40 percent winners, so they know many of their trades will be losing trades. That's why good money management and risk reward ratios are so important. I personally shoot to keep my win to loss average above 70 percent, and considering that I am working with a set of tools that are built around a tool that tells you where price is going 80 percent of the time, that's a very reachable goal.
Now, I got Laura's email about twenty seconds after I was stopped out of Tuesday's trade and here it is:
hi tim,
i've read with pleasure your example of the classic rolling chop formation today on the medianline. and i have a more simple question. if you look at your first chart it's obvious that price never reached the medianline. so could we assume the hagopian rule? and if you would put some andrews trendlines on the chart, we should see that price is behind a P5. with these two facts, isn't it a little bit risky to short again? or do you "just" say, ..i short until the upper medianline is broken? i just ask because i wouldn't have shorted after this down move again
thanks laura
On the forum, I glibly replied:
Laura:
Well, it isn't a classic Andrews technique, but something I learned for day trading copper. It often works like a charm.
Just for the record, I shorted it again today, after it made a new low, and got stopped out for a fifteen point loss, so your observations may be just as correct as the points I made yesterday. It works well for me, but obviously, nothing is 100 pct. And pondering your question, I obviously in hindsight see today's short, especially, was a lower probability trade entry.
Tim
While I tidied up my office that afternoon, her questions rolled around in my head and I began to wonder if I paid MORE attention to Hagopian's Rule, how would it have impacted all the "rolling chop" trades I've made in the past fifteen or twenty years? Here is Hagopian's rule, as stated in Dr. Andrews' original course material:
Hagopian抯 Rule:
When prices reverse trend before reaching a line at which probability indicates such a reverse could start, proper action may be taken in buying or selling, as soon as prices cross the trend line they were moving along before reverse. (Mar. Corn, e.g.)
A large countermove is indicated and confirms the first action as above, when prices cross the first Trend Line sloping away from the original line. This line may be a trend line, a median line, a reaction line, or a moving average line. The rule still applies.
And here's a more palatable description, directly from Laura:
Price should reach about 80% the ML and if not, means before price reach the ML it reverses, then you have a high possibility of a large countermove. this countermove will take price above the last pivot. And if you draw a line from pivot A to C, then you would have your entry trigger.
Now, I literally spent thirty or fourty hours this week, going through hundreds of these actual trades. Luckily, I keep charts with my records of each trade, going back...well, nearly thirty years, so the task is a little easier because I can do a quick visual once I locate each "rolling chop" trade to see IF Hagopian's Rule applied in each trade, and how it effected the outcome. While it turns out that in the vast majority of the trades, price HAD tested the measured line, either the Median Line or Upper/Lower Median Line Parallel, I found that in the cases where price had not made it to the "line of probability," taking the trade as price stretched back out did not have as high a probability of being a winning trade as when price HAD tested its "line of probability." I calculated that the trades that were taken after price had tested its "line of probabilty" were profitable about 75 percent of the time., while those taken when price hadn't reached its "line of probability" were profitable about fourty percent of the time. In other words, Laura's observation regarding Hagopian's rule was spot on, and I thank her for asking the question.
Regarding the pivot counts, in many of these cases, I see little, if any, value in anticipating a turn just because I can count five pivots. So often, I see P7, P9, P11 form...To me, the most important aspect of the pivot count is drawing in the P0-P4 line and IF that line is violated, then I rethink my view of what I thought was the trend. But until P0-P4 is taken out, I am not much of a pivot follower. Dr. Andrews used pivot counts to organize his thought process in each market, but unlike Elliot Wave, for example, he did not look for the fifth pivot to be an end of the trend in the sense that he would automatically assume the trend had ended once he could count five pivots.
Now let's take one last look at this market, using a sixty minute chart, and see one aspect of Hagopian's Rule that I DO use regularly: When price fails to make it to the Median Line and then heads quickly in the opposite direction, IF the Median Line Parallel price is approaching hasn't repelled price before, I expect price will run through it and run through it about as far as price missed testing the Median Line. If this description is clear as mud, maybe a picture will be worth a thousand words...
http://www.medianline.com/images/550_feb62005d.gifClick To Enlarge
You can see just how well the measuring objective forecast the size of the "overshoot" in this case. I hope these examples of back-to-back trades, one a winner, one a loser, are interesting and informative. And Laura, just keep asking those questions. I had to spend about fourty hours of grunt work before I felt comfortable with my answer, but in the end, it was worth the effort: In most cases, I already used Hagopian's Rule...and when price didn't test its "line of probability" the probability of success of this type of trade drops dramatically.
I wish you all a great week of trading!
Act, don't Re-act!
Feb. 12, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_feb122005a.gifClick To Enlarge
February 12, 2005 Comments: I'd like to continue our discussion of using Hagopian's Rule, blended with my own use of measuring objectives to "map out" where the market is most likely headed. I constantly get these types of questions sent to me via private email: "How do I choose the pivots for a Median Line and what do I do if price trades outside of the Median Line or doesn't make it to the Median Line or its Upper or Lower Parallels? Did I draw the wrong Median Line? Do I discard the Median Line once price trades outside the Upper or Lower Median Line Parallel?"
Looking at the image above, you can see I used a Schiff Median Line to project the potentials of price and time. If you took the time to go back and look at this period, you'll see this was an easy choice of pivots, because any other set of pivots were immediately violated by price movements. Remember! Many times, the Median Lines will TELL YOU whether they are or are not likely candidates for good projections by the way they interact with price action very near the pivots you choose. If you pick what seem like three logical pivots and then draw the Median Line in and see that price is already trading far through the Upper or Lower Median Line Parallel, this is probably not the best Median Line set. Draw again, using a different set of pivots, or try using a Schiff Median Line. Or remember that gaps have TWO pivots, and they can be used as highs or lows! In other words, draw lines, draw more lines and draw more lines! Eventually, you get a feeling pretty quickly whether what you just put on a chart has a chance of being useful.
Going back to the chart above, you should immediately notice two important things about this chart: The first thing I notice is that price has tested the Upper Median Line Parallel three times and each time, the resistance formed by the Upper Median Line Parallel has held the price advance in check. And then looking more closely, you should notice that earlier, when price traded below the Median Line, price was NOT able to trade down to test the Lower Median Line Parallel. This should always be filed away in the back of your head , because this is the direct application of Hagopian's rule: If price doesn't trade lower to the "most probable" line, expect a strong movement in the opposite direction.
Does that mean price will just run through all upper resistance until it goes to the moon? Of course not. In fact, the real importance of Dr. Andrews' work was to show time and time again that price only carries so much potential energy with it at any given time, and once that energy is spent, price will stall and either consolidate or will fail and move in the opposite direction. Where is price likely to be when it expends its stored energy? At a Median Line or Upper or Lower Median Line Parallel . Again, I call these the "most probable lines."
So now we have a longer-term chart that has been tested at least three times and done a very good job describing price . We're feeling good about this chart, so let's move to a fifteen minute version, with the same lines drawn in, the very next day:
http://www.medianline.com/images/550_feb122005b.gifClick To Enlarge
Price shot above the Upper Median Line Parallel on the fourth try and travelled quite some distance before running out of stored energy. Did we have ANY clue that price may be carrying more potential or stored energy than we might normally think, looking at the original 60 minute chart? Yes! The failure of price to trade low enough to test its "most probable" line, the Lower Median Line Parallel, alerted us that price MIGHT be carrying a bit more energy, energy that most likely would be spent on an up-side rally. The "most probable" line to the upside was the Upper Median Line Parallel, so if we had reason to believe price was carrying MORE than the "normal amount of stored energy, we should be looking for it to potentially break through that "most probable" line, because of its inability to expend all its energy to the downside earlier--eventually, that energy will get spent! And price spent that extra energy overshooting the Upper Median Line Parallel.
Once price has expended its stored energy, it is either going to form an Energy Coil and re-store its energy in a trading range or it will head in the opposite direction, to its "most probable" line. In this case, the most probable line to the down side would be a test the Upper Median Line Parallel. And as you see, price made a beautiful test of its "most probable" line, the Upper Median Line Parallel, and then headed back higher. Again, once it had spent its energy--this time to the downside--it either had to re-store its energy by coiling or it had to trade back higher.
Now note that I added a line that was parallel to the Upper Median Line Parallel that touches the top of the overshoot. That's a Sliding Parallel, and it carries the same frequency as the Median Line and Upper and Lower Median Lines now, meaning it is now in the class of "most probable" lines. So as price turns back up after testing the Upper Median Line Parallel, its "most probable" line, or the area where it is most likely to run out of its stored energy, is this Sliding Parallel line.
Now let's do something very important: Let's play "What if..." What if price doesn't make it to the Sliding Parallel? That would leave us two choices: First, price may be forming an Energy Coil to re-store the energy it spent on these recent sharp moves. If this is the case, when price re-tests the Upper Median Line Parallel from above, that support will hold and price will turn back up again. But we have a second possibility as well: Price may turn back lower and NOT stop at the Upper Median Line Parallel, its "most probable" line. If this happens, we again have a case where we can invoke Hagopian's Rule and use my own meauring method. If you look at the chart, you'll see I added a line underneath the Upper Median Line Parallel, one that runs parallel to it, but is the same distance below the Upper Median Line Parallel as the Sliding Parallel is above it. This Inside Sliding Parallel also carries the same frequency as the Median Line, the Upper and Lower Median Line Parallels and the Sliding Parallel above the Upper Median Line Parallel. It is also a "most probable" line and should price bust down through the Upper Median Line Parallel, the next area where it would most likely run out of energy is at this Inside Sliding Parallel.
Here's my own charting rule: If you add a Sliding Parallel above a Median Line or outside the Upper or Lower Median Line Parallel, add one on the other side of the nearest original "most probable" line right away--you'll most likely end up using it IF the Sliding Parallel you first added was meaningful. Now let's see whether price kept heading higher to test the Sliding Parallel, its "most probable" line, or formed an Energy Coil to re-store energy, or turned lower again and headed down through the Upper Median Line Parallel:
http://www.medianline.com/images/550_feb122005c.gifClick To Enlarge
Price tries to trade higher but fails well before making it to its most probable line, the Sliding Parallel. It gaps open lower the next morning, just below the Upper Median Line Parallel, and if you were tuned in to Hagopian's Rule, you'd be thinking that since price couldn't make it to the "most probable" line to the up side, its likely to continue lower, to a test of its "most probable" line to the down side, in this case the Inside Sliding Parallel. If you know how to trade "zooms and re-tests," the next bar gave you the opportunity to sell at the re-test of that Upper Median Line Parallel. You'd then be looking to take profit as price approached the Inside Sliding Parallel. And looking at the chart, price quickly traded lower and tested the Inside Sliding Parallel, its "most probable" line. And we would expect that at this point, price SHOULD have expended its downside energy. This means that price will either now form an Energy Coil and re-store its energy, or trade back higher to its "most probable" line, the Upper Median Line Parallel.
The next morning, on economic news, price spiked higher, running up through its first "most probable" line. Where is it headed then? It's most likely heading back to a re-test of the Sliding Parallel, its next "most probable" line. And you can see on this chart that price tests the Sliding Parallel above the Upper Median Line Parallel in both the first two bars of the morning, but then ends up down quite some distance from that Sliding Parallel at the close of the second bar--In fact, it closes back below the Upper Median Line Parallel! Price used its upside energy in one quick rush! When that second bar closes, I add in a new down sloping Median Line, and all three of the pivots use the frequency of this Sliding Parallel .
Without going into too much detail, this two bar spike higher that failed to hold its gains is a rail road track formation and this is a very bearish formation. We have covered it here several times and gone over it in the free forum. They are wonderful to trade when you can see them and react in real-time quick enough, which is why it is SO important to have played "WHAT IF" and drawn in the Sliding Parallel and Inside Sliding Parallel in the first place. This gave you the right context to be looking for the areas where price had "run out of gas," which is exactly what happened. Like a car with no brakes climbing a steep mountain road, when it ran out of gas, it came down as fast or faster than it went up. Price should again be headed towards its next "most probable" line OR it should form an Energy Coil to re-store energy. Let's see what happens:
http://www.medianline.com/images/550_feb122005d.gifClick To Enlarge
Price continues to spike lower and it tests the Inside Sliding Parallel to the down side, where it does indeed run out of energy. When it turns higher, it doesn't make it back up to its "most probable" line, the red Upper Median Line. So again, it's important to play "What if..." and remember Hagopian's Rule. If price isn't going to make it up to its most probable line, it will form an Energy Coil or it will have extra energy to expend to the down side, and we should anticipate this as one of the possibilities. So I take the measurement from the Sliding Parallel to the Upper Median Line and now I draw in another Sliding Parallel, this time below the Median Line. Note that there are still several lines below price that are "probable" lines, but the Sliding Parallel and its mirror Inside Parallel have been catching price so well, its not unrealistic to add this line immediately, just in case price contains much more down side energy than we expect.
Price then trades below the Inside Sliding Parallel again, telling us that it indeed has quite a bit of down side energy left to expend. Where is its next down side "most probable" line? We have the thinner blue Lower Median Line Parallel, but I don't favor this line because price hasn't "respected" any of its lines, although it has generally stayed within the bounds of its Upper and Lower Lines as price traded lower. In effect, the thin blue Median Line set has shown us the general speed of the decline of price through time, but it hasn't really yet acted as support or resistance, which means its lines haven't once successfully predicted an area where price would have expended its energy. I think of these untested lines as "price through time" guides, but not as support and resistance areas. So the next "most probable" line is the red Median Line. Let's see where price heads now:
http://www.medianline.com/images/550_feb122005e.gifClick To Enlarge
You can see price heads lower and DOES test the thin blue Lower Median Line Parallel after gapping open lower and the support formed by the thin blue Lower Median Line did a good job showing us where price was likely to run out of downward energy. Indeed, price started back higher, back towards either its "most probable" line to the upside or into an Energy Coil to re-store energy after such a prolonged move lower. But price was unable to test its upside "most probable" line, so we are again left with Hagopian's Rule: It's likely going to be heading lower, and probably accelerating. And again, that's the importance of why we played "What if..." earlier and added that lower Sliding Parallel. If price doesn't form an Energy Coil or at least find support again at the thin blue Lower Median Line Parallel, we're most likely heading to a test of that Lower Sliding Parallel.
And of course, price doesn't form an Energy Coil, nor does the thin blue Lower Median Line Parallel hold. Instead, price plunges lower again, as Hagopian's Rule suggests, and heads right to a test of the Lower Sliding Parallel, which is its "most probable" line. Let's see what price does now that it's made it all the way from the Upper Sliding Parallel to the Lower Sliding Parallel:
http://www.medianline.com/images/550_feb122005f.gifClick To Enlarge
After reaching the Lower Sliding Parallel, price forms a nice trading range, an Energy Coil that it uses to re-store its spent energy before making its next move. The multiple bottoms that form act as a nice base and as price is increasingly unable to make any progress to the downside, you can again invoke Hagopian's Rule and expect a more extreme move in the opposite direction, which we get several days later with a fast move up to test the red Inside Sliding Parallel, which has acted as one of the three important "most probable" lines in this example.
I put this presentation together as price unfolded the past ten days or so, in the hopes that it would illustrate how I draw lines, add lines and try to play "What if..." as price and time unfolds in front of me. It is never as simple as drawing one set of lines. Many traders would have simply discarded the original red Median Line set once price traded aggressively above it, but it seemed clear to me that though price was "dis-placed" or shifted away from the Median Line, its frequency of energy still matched that of the original Median Line. And that's where tools like Sliding Parallels and Warning Lines and Measuring Objectives and Multiple Bottoms come in--they are the tools you can use along with the base of the Median Line to help you project just where price may run out of energy. All you have to do is keep playing "What if..."
This is a long presentation. It may be full of grammatical errors and spelling errors, but for this evening, I have run out of energy and time and now I must go read to my little ones before bed. I have cut the number of charts from over fourty down to the present number, so hopefully, the charts still flow along with the text.
I wish all of you a good week trading!
Act, don't Re-act!
Feb. 15, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_feb152005a.gifClick To Enlarge
February 15, 2005 Comments: The Euro FX futures gapped open higher, continuing their higher run from the third test of the multi-bottoms on February 10. We left a gap behind, then consolidated a bit, and now gapped open higher again this morning, right into the overhead resistance formed by the Rail Road Track spike high on February 4, and near the blue up sloping Median Line Parallel. Note that price did not make it high enough to test the Upper Median Line Parallel, and until it does, you can invoke Hagopian抯 Rule, so IF price climbs back up in the next few bars to re-test the Rail Road Track spike high level again, we抣l get short there, with a stop three ticks above the high of this morning抯 first bar.
http://www.medianline.com/images/550_feb152005b.gifClick To Enlarge
Two bars later, we get filled on our order and we抮e short Euro FX futures at 130.48. We抣l set our stop, as I said, at three ticks over the high of the first bar, at 130.60. Where is our initial target to the downside? If price had tested the Upper Median Line Parallel, I抎 be looking to take profits at the Median Line, but since it failed to do so, I expect it will have more down side energy to expend than normal, so I抣l look to take profits three ticks above the up sloping Lower Median Line Parallel., at 129.88. And IF we get through the Median Line without before we get stopped out of our position, we will snug our stops first down to break even and then we抣l keep moving them lower as price allows to lock in profits. Let抯 see how this trade unfolds:
http://www.medianline.com/images/550_feb152005c.gifClick To Enlarge
We are soon able to snug our stops to break even and after a handful of bars, our profit order gets filled at 129.88.
http://www.medianline.com/images/550_feb152005d.gifClick To Enlarge
I actually contemplated attempting a long position as price approached the "Gap Filler" line, but price doesn't get quite low enough to approach what I consider a good risk reward area. As it begins to climb higher, I erase the up sloping Median Line I had been using and draw in a new one, using this new low as the lowest pivot As you can see, price worked its way higher the rest of the day.
I wish you all good trading!
Act, don't Re-act!
Feb. 16, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_feb162005a.gifClick To Enlarge
February 16, 2005 Comments: The Euro FX futures gapped open higher again this morning but again, price failed to make it to a test of its "most probable" line, which led me to look for an area to get short. One of the forum members asked me via email privately about the sell set up yesterday. His question was, "I understand that the first bar did not touch the Upper MLH...but how did you know it would not a few bars later? Sometimes price stalls a bit and then makes a higher high...Why were you so confident that resistance would hold? I would never have seen this because I would be waiting for a 123 formation to alert me to the trend change." As I explained to him in my reply, price was testing the Rail Road Track spike high for the first time and that, along with the nearness of the Upper Median Line Parallel, gave me enough confluence to like the set up. But this morning's sell set up was a bit more traditional, in that there are signs telling you price has turned and then we wait for a sell set up and hop aboard.
Looking at the the above chart, you can see that price gapped open and made a spike high in the first bar . Note that it failed to test the Median Line. Once the first bar closed, I added a red down sloping Median Line set, to show myself the Energy potential IF a top has just been put in. It then sold off and tested the up sloping blue Median Line Parallel. When the size of the bars begin to narrow as price is testing the Median Line Parallel, price is telling you it is re-storing energy and a move is coming: It is either going to respect the Median Line Parallel and head back higher and make a run for new highs or it is going to zoom through the Median Line Parallel and expend the stored energy to the downside. When price closes below the Lower Median Line Parallel, because price failed to test the Median Line during the opening spike high bar, I am willing to attempt a short position. IF price re-tests the Lower Median Line Parallel, I will get short, with a stop a handful of ticks above the bar that just closed below the Lower Median Line Parallel. My sell order is at 130.35 and the initial stop is at 130.45. If price heads back into the Median Line set, at best this will get messy and I just don't want to risk much. The trade should work quick and clean if it is going to work. Let's see how it plays out:
http://www.medianline.com/images/550_feb162005b.gifClick To Enlarge
It takes a few minutes, but we get filled at our price and then price turns down hard. Our stop is already so tight, there is no need to snug it up right now. Our logical profit area would be the red down sloping Median Line, which comes in at 129.78, so I enter an order three ticks above this intersection level, at 129.81. There are two very key supports below this market and if price gets near the Median Line, I want to make certain I book profits. Although price could run quite a bit lower, it could also jump back out of the hole if these two supports hold. Let's see where price goes next:
http://www.medianline.com/images/550_feb162005c.gifClick To Enlarge
Two bars later, we get filled at our price at 129.81. I cancel my stop order and make certain my broker is working no further orders for me. Then I look again at the chart. I really like the confluence of support formed by the prior swing low and the Gap Filler line. With a nice profit in the bank for the day already, I want to try to get long IF the support holds. Now, let's go back to the first trade: I sold a pull back AFTER price had turned, instead of trying to pick a top. Sometimes that's just a safer bet. Although I could simply buy at or just above the confluence of support, let's see if we can find a long set up that gives us good risk/reward and comes after we observe what might be a change in trend:
http://www.medianline.com/images/550_feb162005d.gifClick To Enlarge
Price continues lower, zooming through the down sloping Median Line and then going on to test both of the support lines before closing back above the Median Line. This is the same set up we used to get short earlier in the day, only this is a buy, not a sell of the re-test. IF price comes back to the Median Line, I'll get long. My initial stop will be three ticks below the low of the day, which is also below the confluence of the support lines. My buy order is at 129.73 and my initial stop is at 129.60. Let's see what price does next:
http://www.medianline.com/images/550_feb162005e.gifClick To Enlarge
We do manage to get long at 129.73 and enter our stop at 129.60. Now where's our profit target? In this particular instance, I'm not worried about price having overshot the Median Line, because it just tested key support. In a sense, the stops that probably pushed price to that second line of support, the Gap Filler Line, gave price more than enough energy to make up for any it lost overshooting the Median Line. Looking at the morning action, there is a consolidation of lows, right below the area we went short, and that's where I'll place my profit order. And one more thing: If we get one more bar that closes above the Median Line before we get stopped out, I'll bring my stop up to break even. I enter my profit order at 130.28. Now let's see how it plays out:
http://www.medianline.com/images/550_feb162005f.gifClick To Enlarge
The very next bar also closes above the Median Line, so I call my broker and move my stop to break even. Because we are trading within a down sloping Median Line set, if price heads back lower, I don't want to give anything away now. But as you can see, that wasn't a worry. Price coiled for a handful of bars and then spurted higher, hitting our profit target. Note that by the time price hit our profit target, time had move it to be confluent with the red down sloping Upper Median Line, so the profit target choice was a good one, even if price continued higher as the day session finished up. I call my broker, cancel my stop order and make sure I am flat and working nothing, as I do after each trade is completed.
So we worked two nice trade set ups today, one from the short side and one from the long side. And both set ups came after change in trend confirmations, making them "higher probability" trades. I hope these are interesting and informative examples of using basic Median Line techniques to take short-term profits out of the markets.
I wish you all good trading!
Act, don't Re-act!
Feb. 19, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_feb192005.gifClick To Enlarge
February 19, 2005 Comments: Today, let's look at a high probability trade set up in the Canadian Dollar Futures. You've seen me show zoom and re-test set ups here many times before but this particualar trade set up is even more reliable, because of the addition of Fib confluence in the same area as the re-test of the zoomed Lower Median Line Parallel. Energy Points are areas where confluence attracts price. Think of these areas as almost magnet-like, in that price seems drawn to them like moths are drawn to a flame. And once price gets to these areas, expect either a return to the prior direction or an acceleration of price in the same direction .
Looking at the image above, you can see I used a "second pivot" Median Line, which simply denotes that the second and third pivot I chose were not the first major pivots directly following the first or "A" pivot. The trade set up analysis begins by noting that price closed the prior day just below the Lower Median Line Parallel, in effect "zooming" through the Lower Median Line Parallel on the closing bar. This sets up a sale area when price re-tests the Lower Median Line Parallel from below. Now note that price gaps lower on the open the next morning , further strengthening the validity of the down move. Now keep in mind what Dr. Andrews said in his original course material about prices gapping through or "zooming" these types of lines: "When prices pass through or gap the ML , they will pull back to it. Always expect a retracement back to re-test these lines and once they are tested, a resumption back to the trend." So our trade is to get short IF price gives us the oppportunity by pulling back to re-test the Lower Median Line Parallel from below.
http://www.medianline.com/images/550_feb192005b.gifClick To Enlarge
Looking at the next chart, you can see a perfect example of an Energy Point. Once price makes a spike low during the first bar of the day, I measure the distance from that low , back to the prior swing high . I then calculate the 38.2 percent Fibonacci retracement, which comes in at 8138. Now look where this area is: Right at the area price will have to touch to re-test the Lower Median Line Parallel. This is a classic Energy Point, and once you learn to identify them, they can be used to enter very high probability trades.
http://www.medianline.com/images/550_feb192005c.gifClick To Enlarge
Looking at the next chart, you can see our simple tactics: We put an order in the market to get short at 8138, at the Energy Point. We expect price will be drawn to this area and will then likely reverse back in the earlier morning's trend lower. Our initial stop will be three ticks above the high of the second to the last day's bar from Thursday, which comes in at 8142. If price has enough energy to get to 8145 and stop us out, the "zoom and re-test" probability of being successful goes down dramatically, so we want out if price gets that high. Note: We'd ALSO get out if price closed above the Lower Median Line for two consecutive bars without stopping us out, because if it spent that much time above the Lower Median Line, the "zoom and re-test" is most likely not working. Let's see how this plays out now:
http://www.medianline.com/images/550_feb192005d.gifClick To Enlarge
You can see in the next chart price climbed back to re-test the Lower Median Line Parallel and Energy Point, just getting above our entry point. But once up there, it found lots of sellers and turned on a dime--Just as this trade is supposed to work! Let's see what the next few bars show us, so we can decide on a Logical Profit Target and try to move our stops to at least break even:
http://www.medianline.com/images/550_feb192005e.gifClick To Enlarge
Price immediately went into an Energy Coil, trying to re-store the expended energy from the earlier spike lower and then the climb out of the hole. There is really no room to snug our stops to break even here and give the trade any kind of room to work, so since they were tight stops to begin with, let's try to be patient and see if price comes out of the Energy Coil to the up side, stopping us out, or to the down side, giving us a profit opportunity:
http://www.medianline.com/images/550_feb192005f.gifClick To Enlarge
We finally get a close below the Energy Coil, leading me to think we may see some further movement to the downside here. But it's getting well past the middle of a Friday trading session, so I want to identify a high probability Logical Profit Target, while price seems to have some down side momentum going. I measure the distance from the prior swing low at Pivot "C" to the last swing high at Pivot "D" and then calculate the 38.2 percent Fibonacci retracement of that distance. It comes in at 8110, and from my days of standing in the currency pits at the CME, I know the "smart" floor traders will have that number on their "numbers list," and you can bet they'll attempt to buy the first attempt price makes to trade through that area, especially on a Friday afternoon. And then if it doesn't bounce, they'll push it lower, trying to run any resting stops below this first major Fibonacci number. But I'm only concerned with getting my money out of the trade, clean and easy. I put in an order to exit my short position three ticks above this major Fib number, at 8113. And now that price has broken below the Energy Coil, I snug my stops to three ticks above the top of the Energy Coil, which just happens to mean I am now working a stop profit order at 8137. I also make tell my broker to make this order part of a contingency order, paired with a MOC Stop. This means that if either my profit order or stop order doesn't get hit during the session, my broker will get me out at the close. I do not want this to turn into an overnight trade. NEVER turn day trades into overnight trades. Let's see what price does now:
http://www.medianline.com/images/550_feb192005g.gifClick To Enlarge
You can see price came down and just kissed the major 38.2 percent Fibonacci retracement at 8110 and then shot back higher. We were filled on the spike down to test the Fib area, so we are not concerned with the whats or whys of it climbing out of this hole--but as I always say, it's best to leave the party before the rush starts, because the door often gets very small...Once I see price trade through my profit order, I call my broker and make sure both my stop profit order AND my MOC STOP orders are cancelled. I then check that he agrees I am flat, and as a last double check, I say to him, and have him repeat to me, " I'm flat and working nothing, right?"
This was a classic example of how a "zoom and re-test" should work and it had the added reliability of the Energy Point confluence going for it. I hope you find it an interesting and informative presentation of a simple trading technique that you can put into your trading tool kit.
Have a great weekend. I wish you all good trading!
Act, don't Re-act!
Feb. 22, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_feb222005a.gifClick To Enlarge
February 22, 2005 Comments: The forums members are too fast and too smart for me! Someone commented this morning: "I noticed one interesting thing that you overlooked or is it just a coincidence? The D and E points are equidistant about the ML! Point D is about the same distance above the ML that Point E is below the ML. Can a Sliding Parallel be used on this type of trade or am I just trying to read too much into the chart..."
In point of fact, earlier last week I mentioned that when I get a spike move like that, I immediately draw in the same measured distance below the "most probable line," which in this case would have been the Median Line, since price WAS heading up to a test of the Upper Median Line and then failed--and in most cases, I also add that same measured line or Sliding Parallel below the NEXT "most probable" line, which in this case would have been the Lower Median Line Parallel. I purposely did not show this set of Sliding Parallels on the original presentation over the weekend because I was building a second set of charts, from a second view point, that would be geared for traders willing to hold the trades overnight. In other words, I was going to re-present the same movements, with similar charts, but from the view point that the trades were to be kept overnight...In any event, before I could complete this second set, his question was posted and to keep the charts relevent, I decided to post the chart above, showing the movement of price around the Median Line, with the Sliding Parallels now clearly marked in. You can easily see just how well the measure of the overshoot gave you the exact support area of the first bar the next day, at the same distance BELOW the Median Line. Does this happen often? You bet it does! Once you start to draw these types of lines regularly and correctly, you'll watch them work over and over and over again.
Note that I left the original "day trading" presentation here, below this update, so you could simply compare the charts. If I have time this afternoon/evening, I'll finish the "overnight" presentation and post it here. If not, we'll perhaps put it up on the forum web site as a special presentation, along side the original "day trading" version. In any case, they are both fascinating case studies of how Hagopian's Rule can be applied, along with my own measuring technique, to find these Energy Points in the market place, no matter what time frame you are trading.
http://www.medianline.com/images/550_feb222005b.gifClick To Enlarge
February 19, 2005 Comments: Today, let's look at a high probability trade set up in the Canadian Dollar Futures. You've seen me show zoom and re-test set ups here many times before but this particualar trade set up is even more reliable, because of the addition of Fib confluence in the same area as the re-test of the zoomed Lower Median Line Parallel. Energy Points are areas where confluence attracts price. Think of these areas as almost magnet-like, in that price seems drawn to them like moths are drawn to a flame. And once price gets to these areas, expect either a return to the prior direction or an acceleration of price in the same direction .
Looking at the image above, you can see I used a "second pivot" Median Line, which simply denotes that the second and third pivot I chose were not the first major pivots directly following the first or "A" pivot. The trade set up analysis begins by noting that price closed the prior day just below the Lower Median Line Parallel, in effect "zooming" through the Lower Median Line Parallel on the closing bar. This sets up a sale area when price re-tests the Lower Median Line Parallel from below. Now note that price gaps lower on the open the next morning , further strengthening the validity of the down move. Now keep in mind what Dr. Andrews said in his original course material about prices gapping through or "zooming" these types of lines: "When prices pass through or gap the ML , they will pull back to it. Always expect a retracement back to re-test these lines and once they are tested, a resumption back to the trend." So our trade is to get short IF price gives us the oppportunity by pulling back to re-test the Lower Median Line Parallel from below.
http://www.medianline.com/images/550_feb222005c.gifClick To Enlarge
Looking at the next chart, you can see a perfect example of an Energy Point. Once price makes a spike low during the first bar of the day, I measure the distance from that low , back to the prior swing high . I then calculate the 38.2 percent Fibonacci retracement, which comes in at 8138. Now look where this area is: Right at the area price will have to touch to re-test the Lower Median Line Parallel. This is a classic Energy Point, and once you learn to identify them, they can be used to enter very high probability trades.
http://www.medianline.com/images/550_feb222005d.gifClick To Enlarge
Looking at the next chart, you can see our simple tactics: We put an order in the market to get short at 8138, at the Energy Point. We expect price will be drawn to this area and will then likely reverse back in the earlier morning's trend lower. Our initial stop will be three ticks above the high of the second to the last day's bar from Thursday, which comes in at 8142. If price has enough energy to get to 8145 and stop us out, the "zoom and re-test" probability of being successful goes down dramatically, so we want out if price gets that high. Note: We'd ALSO get out if price closed above the Lower Median Line for two consecutive bars without stopping us out, because if it spent that much time above the Lower Median Line, the "zoom and re-test" is most likely not working. Let's see how this plays out now:
http://www.medianline.com/images/550_feb222005e.gifClick To Enlarge
You can see in the next chart price climbed back to re-test the Lower Median Line Parallel and Energy Point, just getting above our entry point. But once up there, it found lots of sellers and turned on a dime--Just as this trade is supposed to work! Let's see what the next few bars show us, so we can decide on a Logical Profit Target and try to move our stops to at least break even:
http://www.medianline.com/images/550_feb222005f.gifClick To Enlarge
Price immediately went into an Energy Coil, trying to re-store the expended energy from the earlier spike lower and then the climb out of the hole. There is really no room to snug our stops to break even here and give the trade any kind of room to work, so since they were tight stops to begin with, let's try to be patient and see if price comes out of the Energy Coil to the up side, stopping us out, or to the down side, giving us a profit opportunity:
http://www.medianline.com/images/550_feb222005g.gifClick To Enlarge
We finally get a close below the Energy Coil, leading me to think we may see some further movement to the downside here. But it's getting well past the middle of a Friday trading session, so I want to identify a high probability Logical Profit Target, while price seems to have some down side momentum going. I measure the distance from the prior swing low at Pivot "C" to the last swing high at Pivot "D" and then calculate the 38.2 percent Fibonacci retracement of that distance. It comes in at 8110, and from my days of standing in the currency pits at the CME, I know the "smart" floor traders will have that number on their "numbers list," and you can bet they'll attempt to buy the first attempt price makes to trade through that area, especially on a Friday afternoon. And then if it doesn't bounce, they'll push it lower, trying to run any resting stops below this first major Fibonacci number. But I'm only concerned with getting my money out of the trade, clean and easy. I put in an order to exit my short position three ticks above this major Fib number, at 8113. And now that price has broken below the Energy Coil, I snug my stops to three ticks above the top of the Energy Coil, which just happens to mean I am now working a stop profit order at 8137. I also make tell my broker to make this order part of a contingency order, paired with a MOC Stop. This means that if either my profit order or stop order doesn't get hit during the session, my broker will get me out at the close. I do not want this to turn into an overnight trade. NEVER turn day trades into overnight trades. Let's see what price does now:
http://www.medianline.com/images/550_feb222005h.gifClick To Enlarge
You can see price came down and just kissed the major 38.2 percent Fibonacci retracement at 8110 and then shot back higher. We were filled on the spike down to test the Fib area, so we are not concerned with the whats or whys of it climbing out of this hole--but as I always say, it's best to leave the party before the rush starts, because the door often gets very small...Once I see price trade through my profit order, I call my broker and make sure both my stop profit order AND my MOC STOP orders are cancelled. I then check that he agrees I am flat, and as a last double check, I say to him, and have him repeat to me, " I'm flat and working nothing, right?"
This was a classic example of how a "zoom and re-test" should work and it had the added reliability of the Energy Point confluence going for it. I hope you find it an interesting and informative presentation of a simple trading technique that you can put into your trading tool kit.
Have a great weekend. I wish you all good trading!
Act, don't Re-act!
Mar. 3, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_mar32005.gifClick To Enlarge
March 3, 2005 Comments: I have been working on what has become a 65+ page presentation on a series of trades that occurred in late February. I had intended to present them day by day here, but the work load of preparing the charts and commentary while continuing to work on the project proved to be too time consuming, so finalizing the presentation took first priority. But now that the chart portion of the presentation is finished, I am going to post a "peek" of it here, as a Thank You to all of you for being patient while I was locked in a dark room, laboring over these charts and their accompanying commentary.
What makes these particular trade set ups a bit more unusual is that they revolve around the use of Action/Reaction Lines and as more than one member has commented, we haven't shown many examples of A/R Lines being used successfully . So for better or worse, let's get started with just one of the trades that revolves around a set of Action/Reaction Lines. Looking at the chart above, you'll notice several things: First, I began by drawing in a standard blue up sloping Median Line and its Upper and Lower Median Line Parallels. When price broke well above the Median Line but failed to climb high enough to test the Upper Median Line Parallel, we know from our recent discussion of Hagopian's Rule that a counter move of some significance is likely to occur. And indeed, price begins to sell off, closing the day right at the up sloping blue Median Line and then gapping open below it the next morning. Price then climbs back up to test the gapped Median Line and then goes into an Energy Coil, which is nothing more than a trading range. As we noted last week, price carries a certain amount of "potential energy" with it and once this energy is expended, it must re-charge itself before moving on--either by forming an Energy Coil and range trading until it has re-stored its spent energy or by the infusion of additional "new" energy, via news or events.
Once price begins to break down below the Energy Coil, I draw a line from the spike high above the Median Line through the Price/Time extreme of the Energy Coil. In effect, I have drawn a simple trend line, connecting a spike extreme to the upside, where price spent its final bit of Energy, to the point where it is clear that price has re-stored its potential energy and has begun its new journey. To say it another way, I connected the point in Price/Time where the gas tank was empty to the point in Price/Time where the gas tank was full. I will use this line as my Center Line. If I've picked it correctly, it will serve as much more than a trend line. Why? The Center Line should carry the measurement of the potential energy stored by price in the form of a frequency that we can then project forward as a measuring stick, telling us when price is likely to be running out of energy. But how do we capture that frequency? When we use Median Lines, which are a specialized case of Action/Reaction Lines, we start with three pivots, and those three pivots give us the frequency, in effect allowing us to project, as price moves forward through time, just where price is likely to run out of energy on either side of the Median Line. But here, we are beginning with only a Center Line. We don't have the traditional three pivots to provide us with the frequency to project around the Median Line .
But there is a way to capture or measure the frequency of the energy potential, if we can find another price extreme related to the same Center Line. Let's look at the next chart and see if we can find just such an extreme:
http://www.medianline.com/images/550_mar32005b.gifClick To Enlarge
I look below the Median Line and see the spike low that proceeds the Energy Coil. And before anyone asks, we HAVE discussed this very set of Mirror Spikes, one above and one below the Median Line, on the forum. They are, in fact, equidistant around the blue up sloping Median Line, but that is NOT a requirement for choosing an Action Line, just a nice quirk of this particular example and its beautiful internal harmonic structure. To use this spike low, I draw a line that is parallel to the Center Line, right through the extreme of the lower spike. This lower line is the Action Line, and the distance from the Action Line to the Center Line carries the frequency of price's energy potential in the same way the Upper and Lower Median Line Parallels show the areas where price is most likely to have expended its potential energy as it moves about the Median Line. Now watch how I use this simple measurement to project the energy potential of price into the future:
http://www.medianline.com/images/550_mar32005c.gifClick To Enlarge
I take the measurement and project it to the right of the Center Line and then draw a line parallel to the Center Line through this point. This gives me the 1st Re-Action Line. And unlike the Median Line and its Upper and Lower Median Line Parallels, I do it with no third pivot to work from. As Newton said, "For every Action, there is an equal and opposite Reaction." Babson, in his earlier work, used this simple and powerful concept to create Babson Charts, which he used to measure and project likely activity, generally relating to the function of economic cycles. Dr Andrews and George Marechal then took Babson's simple tool and after tens of thousands of tests, found that it could be used in a novel way to project price as it related to time, which in effect means that it captures or measures the stored potential energy of price and shows where it is likely to be expended. This was a very powerful leap forward and a major improvement over the simple Babson Charts. Now let's see if we can use this new set of lines to make some simple projections and work our way through an actual trade using these lines:
http://www.medianline.com/images/550_mar32005d.gifClick To Enlarge
Note in this next chart that I added the equidistant Inside Sliding Parallels above and below the blue up sloping Median Line. We can use them to help us find an area to initiate a trade. As price moves well below both the bottom of the Energy Coil and the Lower Inside Sliding Parallel, it's important to remember that price was unable to test the Upper Median Line, thus invoking Hagopian's Rule. This means we are expecting a substantial move to the downside and the "most likely" line or target will be the Lower Median Line Parallel. Let's see if we can find an area to get short, anticipating that price will indeed test the Lower Median Line Parallel. Price does make one brief run higher but doesn't test the Center Line. As I have said before, I like price to be "stretched" when I am entering against the current direction of price, because in fact, I am anticipating that price is just about to run out of energy as my order gets filled. That is the theory of this style of trading, in a nut shell: Project where price is likely to have expended its energy in one direction and then enter a position to try to capture the likely move in the opposite direction.
As price pulls back below the lower Inside Sliding Parallel again, I measure where price would intersect with the Center Line and enter an order to go short at that level: 8122. This area has the upside protection of the confluence of resistance formed by the Center Line and the Sliding Parallel, as well as the bottom of the prior Energy Coil and its many bottoms. IF price rallies high enough to get us into a short position, we'll use this area of confluence as protection and place our initial stop three ticks above the top of the prior Energy Coil, at 8137, which would also be well above the Center Line and the lower Inside Sliding Parallel. As I said earlier, our Logical Profit Target is the Lower Median Line Parallel, which comes in at 8092. For this trade, we are risking 15 ticks to make thirty. And after studying literally thousands of these actual trade set ups, I know the probability of this trade being successful approaches 75+ percent, so I am quite comfortable with the trade set up and the risk reward it offers. Let's see where price heads next:
http://www.medianline.com/images/550_mar32005e.gifClick To Enlarge
Price moves higher, getting us short and then runs out of energy right at the Center Line and turns lower. Its down side movement accelerates, once it changes direction and we find we are nearly to our profit target as the bar closes. Though I am tempted to move the initial stop to a "break even" stop, I leave it at its original level, but there would be nothing wrong with snugging the stop up, if you feel like doing so and that matches your trading style. Because this is the first bar of trade, I generally don't change the stops, unless price has closed beyond a major barrier. Let's see what happens next:
http://www.medianline.com/images/550_mar32005f.gifClick To Enlarge
Price meets and surpasses our profit target during the next bar, taking us out of our position for a nice 30 tick profit. I immediately call my broker and cancel my stop loss order and make certain that he agrees I am now flat and that I am working no further orders. As I have said so often here, I make him repeat to me: "You're flat and working nothing." It's a good practice to add to your trading habits. Make it automatic to always check your position and your pending order status, whether you are trading with a "live" broker on a phone or using an electronic trading platform. Over time, this will save you untold amounts in "would be" errors..." that never seem to go in your direction.
Note that though price briefly spiked below the Lower Median Line Parallel, it did not close below it .I file that away in the back of my head, in case I decide to stalk a long position. I can use the distance of the spike below the Lower Median Line as a guage of the "slippage" price is adding to our measurement of its frequency. And note that while price did test the blue up sloping Median Line Parallel, it DID NOT test the down sloping Action Line after it tested the down sloping Center Line. Hagopian's Rule applies here as well, because Median Lines are just specialized cases of Action/Reaction lines, so all the tools we have collected and tested can be applied to A/R Lines in the same way they are applied to Median Lines. The failure of price to test the Action Line to the down side would suggest an up side move of some important magnitude is likely, so we'll watch to see if price continues to hold above this up sloping Median Line or if it heads back lower to test the Action Line:
http://www.medianline.com/images/550_mar32005g.gifClick To Enlarge
The next day, price traded above the Lower Median Line Parallel for the first few hours and then began to look like it might head lower to test the Lower Median Line Parallel and perhaps a Sliding Parallel drawn through the previous day's spike low. But let me point out that this is occurring on a holiday, with the currencies closing at noon Chicago time, so just as things start to get interesting, we're running out of time.I did not add the Sliding Parallel until after the close, because I had no interest in opening a trade with only a few bars left to trade in the day. But remember I had filed away in my head my interest to get long as price approached the area formed by a Sliding Parallel through the spike low of the prior day--Alas, with the day's end so near, the risk reward was unacceptable and we mark it down as interesting and move on. We'll see what price does tomorrow. Perhaps I'll get a chance to enter a low risk long position on the open:
http://www.medianline.com/images/550_mar32005h.gifClick To Enlarge
So much for getting long at a test of the Sliding Parallel!!! As you can see, price gapped open much higher, above the up sloping Lower Median Line Parallel, the up sloping lower Inside Sliding Parallel and the down sloping Re-Action Line! That's quite an expenditure of energy in one single leap! If the Center Line and the Action/Reaction Lines are of any value at all, price SHOULD have expended its energy on this gap higher, but simply selling the opening price up here has no risk reward value, and in fact, if you look at thousands of these set ups , there are much better ways to improve the probability of success: Wait for price to show you it has turned and then look for a proven set up. You might miss a few ticks, but the probability of success will be higher and you'll be able to identify a logical stop loss to trade against. Note that price has one bar above the Re-Action Line and Inside Sliding Parallel but then heads lower and closes below both. To me, this is our sign that price has spent its potential energy to the upside. And more important, it leaves me with a potential trade set up that has a measured stop loss built in, with acceptable risk reward parameters. Take a look at the next chart and you'll see the trade set up parameters:
http://www.medianline.com/images/550_mar32005i.gifClick To Enlarge
IF price climbs back up to re-test the confluence area of the Zoomed Re-Action Line and Zoomed Sliding Parallel, we want to get short. Note that this is literally a "failed" zoom trade, because price immediately traded back below the zoomed pair of lines--and we'll treat these now as having been "zoomed" again from the upside. We want to sell at the intersection of price with the area of confluence and that comes in at 8145. Our initial stop on the trade will be three ticks above the high of the day. The high was 8153, so our initial stop will be 8157. And our Logical Profit Target will be a re-test of the Lower MLH, which comes in at roughly 8115. IF price gives us the entry, we'll be risking twelve ticks to gain a potential 30 ticks. With the high success rate of this type of trade and the greater than 2:1 risk reward, this is a nice trade set up. Let's see if price allows us to get short:
http://www.medianline.com/images/550_mar32005j.gifClick To Enlarge
Price does climb back to and above the confluence areas but makes no headway to the upside, another sign that it is probably out of energy. We are short at our price of 8145 and so far, our initial stop has not been threatened. Several bars later, price closes below the Re-Action Line and during the next bar, begins to accelerate to the down side. Although I don't show it on this chart, as that second bar closes below the Re-Action Line, I snug my stop to "break even" because price has now closed below the Re-Action Line AND the confluence of resistance for two consecutive bars . Let's see where price heads now:
http://www.medianline.com/images/550_mar32005k.gifClick To Enlarge
As you can see, price hits our profit target the very next bar. I immediately call my broker and cancel my stop order and make certain he agrees I am flat. As I have stated again and again, I make him repeat to me: "You're flat and working nothing." If you're using an electronic entry platform, check your orders and position and then make a habit of saying it out loud to yourself. It may sound silly, but the habit will be one that saves you many errors in your trading career.
I'm not going to post more of the presentation here, but I will give you a peek at what action this set of Action/Reaction Lines caught in numerous trade set ups over a handful of days . Here's a look forward, so you can see how price "respected" these Action/Reaction Lines and their Parallels over the next four or five days:
http://www.medianline.com/images/550_mar32005l.gifClick To Enlarge
As you can see, these simple lines are very powerful. There were many very accurate trade set ups generated by these lines in a handful of days. Action/Reaction Lines are a little understood set of tools that share most of the rules of Median Lines. I hope this look at a portion of the presentation Action/Reaction Lines has been both interesting and informative. I wish you all good trading!
Act, don't Re-act!
Mar. 7, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_mar72005a.gifClick To Enlarge
March 7, 2005 Comments: I haven't posted a stock index trade here in a few weeks, so for those of you that only trade the S&Ps, Nasdaqs and Dax futures, here's a nice profitable trade that ties in with our recent discussions of how to use sliding parallels in your intraday trading. This is a classic trade set up. In all of the trades we show here, we want to look for an "edge," something to trade against, something to lean against, something or somewhere in time and price that will give us a clear place to make a stand: On one side, everything's fine...on the other side, we're out of here! The edge needs to be logical, well defined, something we see on a regular basis so we can watch it unfold countless times and "test" its probability of success. And of course, once we have identified the edge, we must couple it with solid risk reward strategies and solid money management, which means we will have to have a complete plan before we enter the trade and then execute the plan automatically, no matter how price and time play out in front of us.
Let's look at the chart above, and see if we can identify just such an edge. And if we can identify an edge, let's try to lay out a solid plan that takes advantage of it, using good risk reward and money management practices.
Price has been trading in an up trend and on Friday, it zoomed through an up sloping Major Median Line. Looking at the chart carefully, we can see that price has flirted with breaking above this Major Median Line several times, but this is the first time we can identify a number of consecutive bars that close above this Major Median Line. That is obviously a sign that price got an infusion of fresh energy on Friday: It had the power to break above two spike highs at the 1223 area and stay above this Major Median Line for the rest of the day. This action from Friday gives us our first clue for what we want to look for in an edge: Price had a fresh infusion of Energy. It's in a strong up trend. It's closed above the Major Median Line for the first time. All of these signs tell us we should be looking for a place to get long to take advantage of the strength of this market *until* it reaches a place where its potential energy has been expended. As the market gets set to open, we get another cue that points us towards a potential edge: Price is gapping open higher, and since the gap is not very great, we can expect that the short-term traders will want to try to fill that gap. IF they try to push this market a bit lower, we see we MAY get a re-test of this up sloping Major Median Line, a classic zoom and re-test set up. That's a time tested "edge" set up that we have shown here hundreds of times: We're going to wait for price to retrace to test what once was Major Long Term Resistance and is now support and we're going to try to get long this market, with stops below this support.
And let's add one more bit of support to this edge: If I take the three pivots I used to draw the smaller time frame Median Line and its Upper and Lower Parallels and do a little simple math, I can project forward, into time and space, likely areas of support and resistance. I think of them as horizontal frequencies that are generated by the interaction of the sloped frquencies carried by the three pivots .Here's the math:
Pivot "a" is drawn off a low of 1198.25
Pivot "b" is drawn off a high of 1217.00
Pivot "c" is drawn off a low of 1204.50
The distance from Pivot "a" to Pivot "b" is 1217.00 - 1198.25 = 18.75
I take that distance and add it to Pivot "c" to give me a 1:1 projection:
1204.50 + 18.75 = 1223.25
A 1:1 projection is the most important projection, because it simply projects forward 100 percent of the inherent Energy in the three original pivots. In other words, it assumes price is continuing forward with constant potential Energy, which is the safest assumption. I do not view these areas as places where price is going to stop and change direction but rather, I view them as Energy Points or nodes or Lagrange Points, which are areas where bodies in motion often rest before then moving on in EITHER their original direction or a new direction. I use these areas in context with other tools to give them meaning.
So let's summarize before moving on: Price zoomed above the Major Median Line Friday and held above it for the rest of the day. Price is gapping a bit higher on the opening this morning, so it is likely that the short term traders will attempt to push price back down to try to fill this opening gap. Looking at the chart, you can see we also identified an area of confluence just below this market: We had two recent prior spike tops at 1123, we have two Median Lines intersecting just below 1123, and we have a 1:1 Fibonacci Projection that comes in at 1123.25. That all adds up to an edge to me. We'll now use this 1123 area to try to enter a long position, with stops below this confluence of support. Let's see how the first few bars of the morning session plays out:
http://www.medianline.com/images/550_mar72005b.gifClick To Enlarge
We've seen the fourth fifteen minute bar of the morning close and price is still above the up sloping Major Median Line and the area of confluence support at 1123. It's not clear that we will get a chance to buy a re-test of the Median Line, but let's set up the paramaters of our trading plan and get our orders in the market in case price DOES re-test the Median Line and confluent support at 1123. First, I calculate where price would intersect with the Major Median Line for the next bar and that comes in between 1123 and 1123.50, so we'll put our buy order at 1123.50, which is just above the 1:1 Fib Projection of 1123.25, right at the intersection of the re-test of the Median Line, above the confluence formed where the two Median Lines intersect and above a pair of spike highs at 1123. And although I didn't draw it in, because it would make the chart TOO cluttered, the Gap Filler line is at 1123.25. I still expect the short term traders will attempt to fill this gap, but with all the support right at this area, I don't think they will be able to push price much lower .
Now, where should we place our stop loss order? The S&Ps can be relatively noisy at times, so we have to strike a balance between minimizing potential losses if we are wrong and yet giving the trade enough room to run in a noisy environment. Several thoughts come into my mind as I look at the chart and think about stop placement in this situation: I want to tuck it below the confluence area. I want to tuck it below the Median Lines. I can't put the stop TOO close or the short term traders might trigger the stop when they attempt to fill the opening gap, assuming there are some stops built up just below that area. What else can I see that might provide another level of support? Looking at the price action from Friday, I see three tops and one bottom that come in at 1122 and so I'll use these multiple tops and bottoms as my final layer of support. I decide to put the initial stop at 1121.50, which is 1 1/2 points below the confluence of support, below the Median Lines and several ticks below these multiple tops and bottoms. If price makes it this far below the support areas and the Median Lines, the re-test has most likely failed and I want to be out of the trade.
The last ingredient of the trade plan is setting an initial Logical Profit Target. This is an equally important part of the plan, because it will tell you whether the risk reward values of the trade are acceptable . Looking at the chart again, I notice that price has moved above the shorter term up sloping Median Line several times, only to fall right back down to the same Median Line. In effect, this market is trading in an up sloping rolling chop. And we can define the area where price is likely to have expended its stored Energy by drawing a line parallel to the shorter term Median Line that bisects the three most extreme prior highs where price clearly DID run out of Energy. It's important to note that we are not saying this Sliding Parallel will halt price in its tracks. We're not looking to get short at the test of this Sliding Parallel. At this point, we feel the market is in an up trend and we are simply looking for an area where price is likely to stall because it has run out of stored energy. It's at that area that we want to get our profits out of this trade. What price does AFTER it reaches this area is not important to us. This is our logical exit point and having it allows us to calculate our initial risk reward ratio. And because this line has a rising slope, the area where price will intersect with this Sliding Parallel goes up just a little bit with the close of each bar.
If the profit target goes up with the close of each bar, how does that square with price carrying a certain amount of stored energy? Think of it this way: If you have one gallon of gas in the tank of your car and if you step hard on the gas pedal, you'll move very fast but you'll burn that gallon of gas you have available much faster than if you pushed on the pedal just a bit and kept going forward at a constant speed for a longer period of time. Your car might jump ahead for a brief period, but you'll soon have expended all your stored energy. On the other hand, a less aggressive use of your gas might get you a further distance over a longer period of bars .
So we calculate where price will intersect with the Sliding Parallel during the next bar, knowing that this intersection level will move higher with the close of each bar. But the initial intersection level gives us a minimum expectation IF the trade is immediately successful. That initial intersection is 1227.75. Now we can look at our risk reward ratio: We are trying to enter a long position at 1223.50, with a stop of 1221.50, a risk of two points. Our initial profit target is at 1127.75, which would be a gain of 4.25 points, which is just about a 2:1 risk reward, assuming we get long and hit out profit target on the same bar we enter. With the high probability of success of this trade set up , this is a very acceptable risk reward ratio. And remember, as time goes forward, our profit target will adjust higher, resulting in a better risk reward ratio .
Now we have our entry order , our initial stop loss order and our initial profit target . We call our broker and give him these orders as contingent orders, meaning they are tied together. For example, it's only logical that we won't sell any E*Mini S&Ps on our stop loss order unless we also buy them at our entry level, because price is currently trading above both levels. To get to our stop loss order, price MUST trade through our entry order, getting us long, so we can enter both of these orders at the same time without worrying about the stop order getting filled BEFORE our entry level is filled. It just can't happen. The tricky part here is the profit order: IF your broker accepts contingency orders, make the profit order contingent on your entry order being filled. Remember: You don't want to sell when price gets to the Sliding Parallel UNLESS you are long from the re-test of the Median Line. If your broker DOES NOT accept contingency orders or if you are using an electronic platform to enter your own orders, you'll have to wait to enter your profit order until you can confirm that you were filled on your entry order. And remember!!! Just seeing the price print doesn't mean a thing. In fact, seeing price tick below your entry price MAY NOT mean you are filled. There are times when these markets are deemed "not held" by the exchanges because of illiquid market conditions, so ALWAYS double check that you are filled on your orders as soon as possible. If you are using a broker, call him and get a verbal fill. If you are using an electronic platform, check the audit trail of the platform and make certain you see your fill confirmed by the exchange. Once you are sure you are long, enter your profit order in the market . If you can, attach an "OCO" to the stop loss order and profit order, which means "One Cancels The Other." In simple terms, if the stop order is hit first, the broker cancels the profit order. If the profit order is hit first, the broker cancels the stop loss order. Now that we have our orders ready, let's see what the markets do next:
http://www.medianline.com/images/550_mar72005c.gifClick To Enlarge
During the next bar, the short term traders do push prices low enough to test the Median Line, just getting a tad below our entry level before price rebounds nicely. We call our broker or check the audit trail of our electronic platform and confirm that we were filled on this move lower. We're now long at the Median Line re-test at 1223.50 and we're working an initial stop loss order of 1121.50 and a profit order of 1227.75. At the close of this bar, we'll adjust the profit order a tad higher, to reflect the upward slope of the Sliding Parallel where we think price will expend its energy. If you're curious, the intersection with the sliding parallel moves higher by just a touch less than .20 ticks each bar. So it does have to be moved higher, but to be honest, in this trade, I wouldn't have moved the profit order with every bar...probably after every couple of bars. Let's see how the trade unfolds:
http://www.medianline.com/images/550_mar72005d.gifClick To Enlarge
Three bars later, price nearly makes it to our profit order. Note that I have already adjusted it higher once. We're now working a profit order of 128.50. But what about our stop loss order? Price nearly hit our profit order, so perhaps we need to re-evaluate whether we want to allow this trade to turn into a loss IF price turns back lower from this point:
http://www.medianline.com/images/550_mar72005e.gifClick To Enlarge
Stop management is the one area where the personality of each individual trader comes into play the most. I am a bit torn here: On the one hand, price nearly hit our profit target, meaning price MAY have expended its stored energy and made its run higher, just missing our profit order. If that's the case, I don't want the trade to turn into a loser before I am stopped out, because in essence, all the logic behind this trade played out as expected but we'll have taken a loss on the trade. On the other hand, I want to give the trade every chance to play out the scenario we spelled out in our plan. In the end, I feel that price has come close enough to the Sliding Parallel that I need to snug up the stops. Looking at the chart, I see that price left two consecutive bars with the same low of 1124.25 and I expect that these double bottom bars will act as some support. If I snug up my stop order to three ticks below these two bars, it will become a break-even stop-loss order. I cancel the initial stop loss order at 1121.50 and put in a break-even stop loss order . Now that we've adjusted both our profit and stop orders, let's see what the market does next:
http://www.medianline.com/images/550_mar72005f.gifClick To Enlarge
For the next four bars, price consolidates in a lower range, not getting low enough to threaten our stops, but not making any new highs either. If you look at this chart, you can see that price has often advanced with a few wide bars higher, followed by periods of smaller "consolidating" bars, so this pattern has been repeated again and again during this "rolling chop" higher. Prices generally trade in a range as Energy is being re-stored, so I suspect Energy is being re-stored and I expect we'll soon either see an acceleration to the upside or an acceleration to the downside. I adjust our profit target again and it is now up to 1229.25. Let's see which way price decides to expend its energy:
http://www.medianline.com/images/550_mar72005g.gifClick To Enlarge
When price moves higher and closes higher for the second consecutive bar, again approaching our profit area, I look at the swing low formed by the past four bars of consolidation. The low of that mini-swing comes in 1225.00, so I snug up my profit stop to three ticks below this swing low, at 1224.25. I also adjust my profit order again, to 1229.50. With any luck at all, we'll get more follow through during this next bar and we're close enough to the profit target that we may get filled.
http://www.medianline.com/images/550_mar72005h.gifClick To Enlarge
Price indeed makes it to our profit target during the next bar and I immediately call my broker to confirm that my profit order was filled at 1229.50 and that he has now cancelled the stop profit order he was working for me at 1224.25. And as always, I ask him to repeat, "You're flat and working nothing," which is just a good habit I have that makes him reinforce to me that I have checked both my position and my order status and everything is as it should be. After executing a nice trading plan profitably, I don't want any surprises. Let's take one last look at how the day played out, so we can see if the Sliding Parallel did indeed give us a good measure of where price's stored energy would be expended:
http://www.medianline.com/images/550_mar72005i.gifClick To Enlarge
As you can see, the Sliding Parallel did a great job predicting just where price would run out of its stored energy. That was as much as we could have squeezed out of that trade, and yet the level was projected before we entered the trade by looking at the prior energy expenditures of price on prior moves higher. I maintain that it is correct to say that price contains a given frequency, or if you prefer to think of it in terms of thermodynamics, price has a finite measurable amount of stored energy in most cases. This type of measured movement based on energy expenditure has been a very powerful tool for me in my trading and once you start to think in these terms, you might find it to be a powerful tool to put in your own trading tool kit as well. I wish you all good trading!
Act, don't Re-act!
Mar. 16, 2005Previous Archive Next Archive
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March 15, 2005 Comments: Let's take a look at another classic high probability trade set up in the E*Mini S&Ps. Looking at the chart above, it's clear price is in a strong down trend, after price traded above the up sloping Major Median Line but failed to test the Major Up Sloping Median Line Parallel. This failure to show any strength above the Median Line, which invokes Hagopian's Rule, is followed up by a gap lower in price and these led the way down. Let's take a closer look using fifteen minute bars and see if we can make more sense of the likeliest direction for today's action:
http://www.medianline.com/images/550_mar162005b.gifClick To Enlarge
Looking at the next chart, you can see I added two new Median Line sets, one down sloping and one up sloping, and that has shown us a potential area of confluence that MAY serve as an Energy Point IF price tests it. What's an Energy Point? These are areas where the interaction of several lines of force interact and the confluence in that area of interaction usually means that price will either stall and change direction or hesitate and then accelerate in the same direction away from these areas. Note that I added an additional layer of confluence by calculating the 50 percent Fibonacci retracement from the last major high to this latest low. Here's the calculations, step by step, so you can see how to do it yourself without using a drawing tool or a fancy stand alone Fib calculator:
The High at Pivot A is 1229.75
The Low at Pivot B is 1202.50
Subtract 1202.50 from 1229.75 and you get 27.25 S&P Points, the distance between Pivot A and Pivot D.
One half of 27.25 is 13.625 S&P Points.
I take that distance and add it to Pivot "D" to give me the 50 Percent Fibonacci Retracement
1202.50 + 13.625 = 1216.125
You'll also notice that the red down sloping Median Line set has an additional line drawn to the right, the 1st Warning Line, which is nothing more than a projection forward in price and time of the distance between the Median Line and the Upper Median Line Parallel--This line carries the same frequency of price and time, so it projects the energy potential forward in the same way the Median Line and its Upper and Lower Parallels project where price is likely to run out of stored energy.
What does all this tell us? Looking at the chart, you can see a great deal is going on right at the 1216 area. This is the equivalent of "X Marks The Spot!" on a treasure map, I suppose. All lines lead us to believe that IF price gets to this area, it will either stall and change direction back towards its lower trend OR stall and then move dramatically higher.
Price closed just below 1208 yesterday . Do we have any sign we can point to that a rally May take place, giving us a potential entry near the 1216 area of confluence? Price traded below the red down sloping Median Line on Friday, but ran out of energy to the down side before testing the red Lower Median Line Parallel. Using Hagopian's Rule, we now anticipate a move higher is in the making. And indeed, prices gapped higher Monday morning and then traded in a range for the first half of the day, before trading lower and zooming down through the blue up sloping Lower Median Line Parallel to make a run at re-testing Friday's lows. But again, price ran out of energy before it was able to test Friday's lows or even test the red down sloping Median Line, which again invokes Hagopian's rule. And when price ran out of down side energy late Monday, it staged a nice rally, closing back above the blue up sloping Lower Median Line Parallel it had zoomed several hours earlier, and this is a nice sign of strength. So it's safe to say we see some signs that price MAY have some up side energy ready for today's market. Let's see how the market opens:
http://www.medianline.com/images/550_mar162005c.gifClick To Enlarge
Here's a zoomed in chart: Prices gap open higher, above the red down sloping Upper Median Line Parallel and fairly near our area of Major Confluence. Let's see if we can construct a trading plan to take advantage of this high probability trade set up. We have a great deal of confluence that SHOULD act as resistance at the 1216 area. We want to get short at or just a bit below that area. And we'll use that area and tuck our stops above it, far enough above it that the general noise inherent in the E*Mini S&Ps should be held in check by the confluence acting as resistance. Let's see how that would look: I'll diagram our orders out on the chart and see if they make sense:
http://www.medianline.com/images/550_mar162005d.gifClick To Enlarge
Looking at this new chart, let's lay out the orders as I have them drawn in:
There is Major overhead resistance at the confluence of lines and the Fib retracement that all meet at 1216.
We want to get short this market as price approaches the area of confluence or resistance, so we'll work an order to get short at the area where price would intersect with the up sloping blue Major Lower Median Line Parallel that was zoomed on Friday. This is a classic zoom and re-test trade, and we know that if there is confluence above these areas, their probability of success approaches 80 percent. We'll work an order to sell E*Mini S&P futures at 1215.50, which is where we currently project price will meet the up sloping Major Median Line Parallel. And though this line has a slight up slope, we won't need to change the level of this order, because there is MAJOR resistance above it. We expect price will either test this area soon and we'll get short OR price won't even rally enough to get to our order and we'll be looking for another trade idea. Why do I think the test will happen soon? Remember: These areas are where we project price SHOULD run out of their potential or stored energy, so it makes sense that this spike is near the end of its run.
We'll place our initial stop loss order two S&P points above the area of confluence--in fact, to stay away from the "even number" syndrome, we'll place our initial stop loss order at 1218.25. This should be far enough above the Major resistance that market noise won't cause our stops to be hit--if price gets up to this area, we're likely wrong about our estimation of the up side energy price is carrying .
The Logical Profit Target is a test of the blue up sloping Lower Median Line. We have to "project" an area where price is likely to intersect with this line, to give us an initial profit target level. That allows to calculate the risk/reward ratio. In this case, our initial Profit Target order will be placed at 1208.50 and that gives us a potential profit of 7 E*Mini S&P points. So we are risking 2.75 E*Mini S&P stops and our initial potential gain is 7 E*Mini S&P points, giving us a risk reward ratio of 7 divided by 2.75 = 2.54, and since the probability of success associated with this trade set up approaches 80 percent, that is a very acceptable risk reward ratio.
Before we move on, remember that our Profit Target will move up slightly with the close of each bar, since the Lower Median Line Parallel has a positive slope. We actually put this order at a level that is where price will intersect with the Lower Median Line Parallel several bars from now, because we assume it will take price a few bars to test the overhead resistance and then a few more bars to make any significant down move once the overhead resistance is tested. But as the day goes on, we'll have to monitor where price intersects with this line and eventually, we'll have to snug our profit order a bit higher as each bar closes, IF we manage to get short. Now let's see what the market does next:
http://www.medianline.com/images/550_mar162005e.gifClick To Enlarge
Price does follow through enough to the upside to get us short at 1215.50 and in fact, it touches the 50 percent Fibonacci retracement area exactly. The bar then closes just below the up sloping Major Lower Median Line Parallel. Remember that we ALWAYS put our entry and stop loss orders in the market at the same time, to protect our capital. If our broker allows it, we enter contingency orders and enter our profit order at the same time--if not, we enter our profit order once we confirm that we are filled on our entry order. If we are using an electronic platform, we check the audit trail once we see price touch our level and we look for the confirmation from the exchange that our order is indeed filled. Then we double check that our stop loss order is in the market and working. We can then place our profit order. If possible, we make the stop loss order and profit order OCO .
Now that we are short this market, let's see how it plays out:
http://www.medianline.com/images/550_mar162005f.gifClick To Enlarge
Three bars after our entry, price has come down nicely from our entry level and the Lower Median Line Parallel, as well as the confleunce area of resistance. As this bar closes, we have a couple of E*Mini S&P points of profit in the trade, but there is no logical way that I see to lower our initial stops yet, because price just hasn't moved far enough away from our initial entry point. Let's see what happens next:
http://www.medianline.com/images/550_mar162005g.gifClick To Enlarge
Price makes a new low for the day, down to 1211.75 and then the bars get smaller and we see three matching tops form, each with higher lows. The narrowing of the ranges of each succeeding bar tells us price is re-storing energy. The higher lows tell us price may take a run to the up side, so putting those two thoughts together, I again take a look at the chart and wonder, can the initial stop be snugged up?
This comes down to personal preference. At this point, you could take partial profits on the trade and look to sell that portion of the position back out IF price re-tests the original entry area, just below the resistance formed by the area of confluence at 1216. Or you could snug the initial stop to break even, but I still feel that the overhead resistance is strong enough to protect our stops and that moving the stops any closer subjects them to the whims of the market noise that the S&Ps are famous for. I elect to leave the stops at their current level. And looking at the profit target we are working, it is just about at the level where price would intersect the Lower Median Line Parallel, so there's no need to move it just yet, though we do need to monitor it at the close of each bar. Let's see if there's any significant rally after this narrowing range:
http://www.medianline.com/images/550_mar162005h.gifClick To Enlarge
Price rallies a bit after the narrow range triple tops are formed and broken, but not enough to test the down sloping red Upper Median Line Parallel or get anywhere near our stops. As price comes back down again, I re-check where price would intersect with the up sloping blue Lower Median Line Parallel and move up our profit target just a touch, to 1209.00. I still like our stop loss levels, so I make no change there. Let's see what price has in store for us now:
http://www.medianline.com/images/550_mar162005i.gifClick To Enlarge
Price spikes lower, hitting our profit target as it runs through the Lower Median Line Parallel. I confirm that our profit target was filled, and then I check to make certain that our stop loss order has been cancelled. As I've said a hundred times before, I make my broker repeat: "You're flat and working nothing." If you are using an electronic entry platform, check your own orders and the audit trail to make sure you are flat and that the exchanges have given you confirmation that your stop loss order is now cancelled. Then get in the habit of saying out loud: "I'm flat and working nothing." It's ok to talk to yourself if it will save you money in the long run...
We're flat and we had a nice 6 1/2 point gain in the E*Mini S&Ps for the day by taking advantage of a classic trade set up with a high winning percentage and solid money management. Let's look at how the rest of the day played out:
http://www.medianline.com/images/550_mar162005j.gifClick To Enlarge
It's clear there was more downside energy to this market than that measured by the Lower Median Line Parallel. Was there a clue that could have led us to chose a different profit target? I never second guess a trade, especially a winning trade. But looking at the final chart, you can see that although price tested the area of confluence at 1216, it never approached it's "most probable line," the red 1st Warning Line, so it would also have been a valid assumption to use the associated red Upper Median Line as a down side profit target, either for all or some of the position. But this comes down to personal trading styles and truthfully, what you saw when you initially made the trade plan. I did not figure the 1st Warning line and the failure to test it into my initial plan, so I won't second guess my original profit target. If you are a fluid enough trader, you could have certainly adapted your orders to reflect this as the day unfolded, but doing that here in these step by step trade commentaries would only lend confusion, so I mention this possibility as a thought exercise to those of you that want to take your trading a step further. I wish you all good trading!
Act, don't Re-act!
Mar. 26, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_mar262005a.gifClick To Enlarge
March 26, 2005 Comments: This is a continuation trade of the one diagrammed two days ago, from March 22. This trade uses the same frequencies to find a suitable up side retracement area where price will likely run out of stored energy and then stall or change direction back to the strong down trend price has been in since early March.
Looking at the chart above, you can see price made a large move down, with no retracements, where it stalled once it tested the green down sloping Lower Median Line Parallel. It's important to note that price moved from the green Upper Median Line Parallel to the green Lower Median Line Parallel in one swift move. In effect, price expended the maximum energy in the minimum time. And more important, price halted exactly where the Median Line set predicted it would run out of energy. The Pivots a, b and c gave us the frequency of this move, which carried both the slope of the path price would take AND the maximum amount of energy price carried with it to expend in a single, quick move. Note that we'll use this same idea in a bit to try to predict where price will again run out of energy. These lines are "energy boundaries," in the real sense, and thinking about them in that fashion may make them easier to use in your trading.
Once price reaches the area where it is most likely to have expended its energy, it can do one of three things: It can change direction dramatically, it can consolidate and begin forming an Energy Coil to re-store the expended energy or it can continue its move past this area, generally by accelerating. Each of these cases obviously require different strategies, but the important thing to remember is that these lines serve as important areas, where price is highly likely to change its current state of action. In this case, price consolidated for six bars, forming a double bottom, and then slowly began to climb out of the Energy Coil or range to the up side. Price traded above the down sloping Median Line for several bars but was unable to hold those gains and closed the day back below the green up sloping Median Line. At this point, we can only say that price reached the area where it should have expended its down side energy. Then it consolidated, perhaps with a brief up side bias, but at the close of the day, it is not clear where price is headed, so we'll continue to think of price as still being in that consolidation after the sharp move down, in effect re-storing the energy it expended. Let's see if we get a better clue about price's next move after the opening few bars of the next day:
http://www.medianline.com/images/550_mar262005b.gifClick To Enlarge
The next morning, price gapped open higher, and so now as traders, we have a decision to make: Are we looking for an area to get long or are we looking for an area to get short ? I continue to feel this market is in strong down trend and so I am looking for a high probability area to get short this market. I like that price has consolidated, which allowed it to re-store its expended energy, especially because by my measurements, it likely expended 100 percent of its potential energy and needed this consolidation before further down side progress was likely. Now the question is if this current up movement will make it to an area I can define as a high probability area where I'd like to get short? Let's see what the market offers us next:
http://www.medianline.com/images/550_mar262005c.gifClick To Enlarge
Price retreats a bit lower after the higher opening and early morning rally. After testing the morning's lows, it rebounds nicely and I begin to suspect that price may test the blue slightly up sloping Median Line. Note that I haven't yet mentioned the 1:1 Fib Projection I marked in brown on these charts. This line simply measures the distance of the move from Pivot b to Pivot c and then adds that distance to the low formed at Pivot d, giving us a projection of where price would be IF it moved the same distance in an up move originating from Pivot d. Here's how the simple math looks:
The low at Pivot b was 1182.50
The high at Pivot c was 1193.75
The difference between the two is the distance travelled in S&P points: 1193.75 - 1182.50 = 11.25 points
The low at Pivot d was 1172.00
Adding 11.25 to 1172.00 gives me 1183.25, the 100 percent distance from Pivot B to C added to the low at Pivot d.
I also didn't mention the pink sliding parallels I added, though in many ways they may be self explanatory. After price tested the green Lower Median Line Parallel, it consolidated a bit and then re-tested the lows for the move but failed to make it down to re-test the green Lower Median Line Parallel. I simply measure the distance between where it stopped and where it should have intersected with the Lower Median Line Parallel and then I add that same measurement to the Upper Median Line Parallel. In its strictest sense, this isn't really a case of Hagopian's Rule but let's say that it is a simple measuring technique I've used over and over to project the likely undershoot and overshoot inherent in these sorts of moves. IF price tests the green Upper Median Line, any price overshoot will generally be contained by this projected sliding parallel.
Now the question is: Do I want to get short IF price makes it high enough to test the blue Median Line? Well, at the speed price is unfolding in front of me, it's easy to imagine that by the time the test of the blue Median Line happens, price may also be testing the green down sloping Upper Median Line Parallel. And this Upper Median Line Parallel represents the area where price will likely have expended its stored energy. And of course, we have already highlighted the 1:1 Projection that comes in at 1183.25, which is in the same area. So we have a handful of important lines in confluence, plus this is the area where price should be out of energy . I will take a shot at getting short this market, if I can identify an initial stop loss and profit target that give me a solid risk reward ratio.
Note that the 61.8 percent retracement from the swing high at Pivot c to the swing low at Pivot d comes in at 1185.50. To get this number, I simply subract the low at Pivot d from the high at Pivot c and find the difference, which is 21.75 S&P points. I then multiply 21.75 times 0.618 and that gives me 13.44 S&P points. I add 13.44 S&P points to the low at Pivot d, and that gives me the 61.8 percent retracement, which comes in at 1185.44. I round that off to 1185.50 and I'll use this very popular retracement level and hide my initial stop above it by three ticks. If price gets that high, it will have broken above the major confluence, expended much more energy than I anticipated it to be carrying and will also have run through a major Fib retracement, where many larger players are likely to have resting sell orders to get short this market.
And the profit target? The logical profit target is at the blue up sloping Lower Median Line Parallel, which initially would come in just above 1172. So we would be trying to get short at the confluence at 1183.25, with a stop at three ticks above the 61.8 percent retracement and our profit target would come in at 1172.25. We'd be risking three S&P points to make eleven S&P points. That's a risk reward ration of over 3.5, which is a nice ratio. This trade does not have as high a success probability as zoom ans retraces, in case you wondered. I measure its general success rate at something approaching 67 percent. But with this high a risk reward ratio, I'll take the trade, if price allows us to get short. Let's see what these orders look like on the chart:
http://www.medianline.com/images/550_mar262005d.gifClick To Enlarge
Everything looks good and the numbers check out. I call my broker and give him my limit sell order, which will get me short at 1183.25, and the initial stop loss order at 1186.25. Remember: I can put the stop loss order in at the same time, because by the nature of where price is currently trading, it can't get to my stop loss order without first getting me short at my limit order of 1183.25. Now let's see what the market does next:
http://www.medianline.com/images/550_mar262005e.gifClick To Enlarge
Several bars later, price spikes higher, through the confluence at 1183.25 and filling our limit sell order.Note that the bar just manages to close above the down sloping green Upper Median Line Parallel, but it didn't make it to the sliding parallel I added earlier. I don't want price to hang around up here too long, or I'll begin to suspect price is consolidating or resting before accelerating further to the upside, instead of changing directions back to the trend lower. And don't forget! Once we see our entry price on the screen, we call our broker and check that our order was filled--and then double check that our initial stop loss order is in the market. Then place our profit order at 1172.25 and tie it to our stop loss order by making it "One Cancels the Other" or "OCO." That means that if either of these orders are filled, it automatically cancels the remaining order. Let's see what price does next:
http://www.medianline.com/images/550_mar262005f.gifClick To Enlarge
The next bar is an inside bar that closes lower, well below the down sloping green Upper Median Line Parallel. I feel a little better about the entry now, but I'm still cautious because this is not my highest percentage trade entry. The next bar is lower as well, though the range has narrowed a bit. And the following bar is narrower still, indicating price is re-storing energy. When I notice that these two narrow range bars have formed a double bottom, I'm feeling a little more nervous again. And then the next bar forms, and although it closes on its low, it is the narrowest bar yet. I look at the chart carefully and decide that if price takes out the high of the day by more than three ticks, I no longer want to be in this trade. Basically, I want to stay in this trade if I was right about price having expended its energy at the calculated level, but I want to risk less as time goes on, because so far, price has given me little to be excited about. This could be coiling action before price makes another leg higher! I call my broker and cancel the intial stop at 1186.25 and move it down to 1185, which is three ticks above the high of the day. Let's see what price has in store for us now:
http://www.medianline.com/images/550_mar262005g.gifClick To Enlarge
During the next bar, price moves lower and it looks like this is the beginning of a strong move lower. But the next bar climbs back above the down sloping Upper Median Line Parallel and closes above it. Price is still unable to test or exceed the sliding parallel, however, and the next bar partially reverses the strong up move and price closes back below the Upper Median Line Parallel. A move now above my entry level would be above the sliding parallel as well. I call my broker and snug my stop loss up to break even, at 183.25. Let's see what price brings us now:
http://www.medianline.com/images/550_mar262005h.gifClick To Enlarge
The next bar moves lower but closes near its highs. But the following bar spikes lower with a wide range bar and price closes in the lower third of this wide range bar, also leaving a double top. It's getting late in the session and if price is going to make a move lower, it's going to have to be soon. I snug my profit stop to three ticks above the double tops just formed, so it is now at 1182.
http://www.medianline.com/images/550_mar262005i.gifClick To Enlarge
The next bar is an inside bar lower, with a narrow range. Following that, price makes a new low for the day. As this bar closes, I snug my stop once again, this time to three ticks above the previous bar's high, at 1180.50. And now I give a "Market On Close" stop order to my broker. This ensures that if my profit order isn't hit before the close and my stop loss isn't hit before the close, my broker will get me out on the close and cancel the other orders. Under NO circumstances do I want to turn a day trade into an overnight position.
http://www.medianline.com/images/550_mar262005j.gifClick To Enlarge
The next bar makes another new low for the day and closes in its lower third. Once it closes, I snug my profit stop lower again, trailing it back three ticks above the previous bar's high, at 1179.25.
http://www.medianline.com/images/550_mar262005k.gifClick To Enlarge
The last bar of the day also makes a new low, but we are not close to our profit target of 1172.25. Remember that we are working a Market On Close Stop and that is indeed how we exit this trade, at 1176, for a gain of 7.25 S&P points. Once we confirm that we were filled on our MOC order, we make certain our broker canceled all our other orders. And we make him repeat to us: "You're flat and working nothing."
I hope you all find this trade set up and the trade management details interesting and informative. If you wish to see the trade that preceded this one, that really set the frequencies up for it, click here:
March 23, 2005 Trade Description And Charts
I wish you all a fine weekend!
Act, don't Re-act!
Mar. 29, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_mar292005a.gifClick To Enlarge
March 29, 2005 Comments: Price has come down quite a ways with little consolidation, so several days of consolidation doesn't surprise me. If you think about the last presentation I posted, featuring a trade from 03/24/05, we got short as price traded higher off of the longer-term support formed by double bottoms earlier in the week. This is one way to take advantage of consolidation: trading WITH the prevailing long-term trend, which to me, still seems to be down. Another way is to identify an Energy Coil forming and then to trade it from either and/or both sides while price re-stores the energy it expended on the prolonged move lower. In the chart above, I contend that the up sloping blue Lower Median Line Parallel and the up sloping blue Median Line are currently acting as the wide boundaries of the Energy Coil, and depending on how price moves after this gap open higher this morning, I'll attempt to take further advantage of this situation, trying to be open to either long or short trade possibilities while price remains within the Energy Coil. Note that I've added a Schiff Median Line that captures the majority of price's action in the past few days. I won't count on this Schiff Median Line set as support and resistance, but instead, I'll use it as a guide to the current direction and potential boundries of price. Let's see what price gives us to work with:
http://www.medianline.com/images/550_mar292005b.gifClick To Enlarge
Price continues to climb higher, towards the up sloping blue Median Line. Note that the last two bars have left double tops and small details like these, especially near the extremes of Energy Coils, can often be important clues. Also, note that I have marked in two Fib Projection areas: The first is support which is formed by measuring the distance from Pivot 4 to Pivot 5 and then using 61.8 percent of that distance added to subtracted from the just formed double tops. Here's how the math is done:
The high at Pivot 4 is 1184.25
The low at Pivot 5 is 1174.75
The distance between the two is simply 1184.25 - 1174.75 = 9.5 S&P points
To find the 61.8 PCT Fibonacci projection, take .618 * 9.5 and that gives you 5.9 S&P points. Subtract that from the double tops just formed at 1183 and you get the projected 61.8 percent support just above 1177.00
The second Fibonacci projection gives us resistance, formed by the distance from the low at Pivot 3 to the high at Pivot 4 and then adding 61.8 percent of that distance to this morning's gap opening low. Here's how that math is done:
The low at Pivot 3 is 1174.25
The high at Pivot 4 is 1184.25
The distance between the two is simply 1184.25 - 1174.25 = 10 S&P points
To find the 61.8 PCT Fibonacci projection, take .618 * 10.0 and that gives you 6.18 S&P points. Add that to this morning's gap low of 1177.25 and you get the projected 61.8 percent resistance just above 1183.00
Now that we have price "boxed in" with similar 61.8 percent Fibonacci projected support and resistance, and have marked the probable top and bottom of the Energy Coil, let's see if we can make sense of this range and suggest any potential trade set ups within this Energy Coil:
http://www.medianline.com/images/550_mar292005c.gifClick To Enlarge
Looking at this next chart, you can see I've outlined a plan for getting long, if price gives us the opportunity. In the next chart, I'll outline a plan for getting short. Here are the parameters for the potential long trade: IF price re-tests the green down sloping Upper Median LIne Parallel, which was zoomed during the second bar this morning, I'll get long at the intersection of price with that Upper Median Line Parallel. I'm starting out with the assumption that the order would be to buy E*Mini S&Ps at 1178. Our initial stop loss would be a move three ticks below the low of the day, which would also be below 61.8 percent projected support I outlined above. The gap open low and low of the day was at 1177.25, so the initial stop loss is at 1176.50. The profit target, if we manage to get long, would be at the re-test of the double top bars just formed, at 1183. This area is just below the confluent resistance formed by the blue up sloping Median Line and the 61.8 percent projected resistance. And of course, the recent swing high offers further resistance, at 1184.25. So in this trade set up, we are risking 1.5 S&P points, for a potential gain of 5 S&P points. This is a risk reward of 3.33, which is more than acceptable, especially since we know the zoom and re-test trades have such a high probability of success. Now let me outline the potential short trade set up:
http://www.medianline.com/images/550_mar292005d.gifClick To Enlarge
The sell entry point would be the re-test of the double top bars just formed, at 1183. IF we managed to get short, our initial stop would be three ticks above yesterday's swing high at 1184.25, which means an initial stop loss order of 1185. Our profit target would be a re-test of the day's low, which was made on the gap opening higher, at 1177.25. This means we would be risking 2 S&P points and our potential down side gain would be 5.75 S&P points, which gives us a risk reward ratio of just about 2.8, also more than acceptable. And besides having layered overhead resistance above us as protection, I also note again that we are still in a down trend, so this is a trade with the prevailing trend. Those two should help add to the probable success of this trade, IF price allows us to get short.
How will I choose which trade to take? I won't! I'll take either or both trades, should the market let us in, since I believe this will turn out to be an Energy Coil day. I call my broker and give him both entry orders. I'll keep stop and profit orders "in hand" until things get a bit more clear, but I do want both entry orders in the market, in case price makes a spike in either direction. Let's see where price goes from here, now that we have laid out a two-headed plan:
http://www.medianline.com/images/550_mar292005e.gifClick To Enlarge
Price makes new lows for each of the next three bars, leaving triple tops in place and closing below the gray up sloping Schiff Median Line. Hopefully, price has tipped its hand and we'll get a chance to get long, But either way, we have orders on both sides in the market, waiting for price to test the extremes of the Energy Coil. Let's see what price does next:
http://www.medianline.com/images/550_mar292005f.gifClick To Enlarge
Price continues lower during the next bar, getting us long at 1178. As I see our initial price print, I call our broker and enter our initial stop loss order at 1176.50 and confirm that we are indeed long at 1178. Then I put in a profit order at 1183, OCO with the stop loss order. And since price has already tested the down side, I also place an additional limit sell order at 1183, so I'll get short IF price gets to our profit target from our current long trade.
http://www.medianline.com/images/550_mar292005g.gifClick To Enlarge
For the next ten bars, price agonizingly climbs a bit higher. The bars are rather uniform in range and the slope of the movement is orderly and consistent. But finally on the tenth bar, price does close back above the up sloping Median Line, so perhaps the long wait will pay off in a nice profit. As a precaution, I call my broker and put in the initial stop loss at 1185, in case the market gets us short at 1183. Let's see what happens next:
http://www.medianline.com/images/550_mar292005h.gifClick To Enlarge
The next bar is a busy one! Price spikes higher, taking us out of our long position for a nice profit and also getting us short at 1183. As soon as we see our limit price of 1183 print, I call my broker and make certain that we were filled on our profit order AND our order to go short at 1183. Then I cancel the stop loss sell order below at 1176.50 and check again that the broker is working our initial stop loss on our new short order at 1183. And I then give him our profit order, at 1177.25. Even though price spiked higher, the bar closed unchanged, in the lower third of its range and at the moment, we have a small profit in our short position.
http://www.medianline.com/images/550_mar292005i.gifClick To Enlarge
Two bars later, price has made two new lows and closes back below the up sloping gray Median Line. As the second bar closes, I call my broker and snug my stop loss to break even. The session is getting late and I have a nice profit in hand already. I like the short position, but if it shows enough strength to get back over the Median Line, I don't really want to risk any profits. Where to now?
http://www.medianline.com/images/550_mar292005j.gifClick To Enlarge
The next bar makes a new low for this move and also closes below the Median Line, so perhaps we are on our way to a second profit on the day...Because we are trading in rather narrow ranges, there is little order management we can do, but one thing I do add now is this: As the session continues to move closer to an end, I feel it's prudent to add a "Market On Close" stop order, which means that my broker will take me out of this position on the close, if my stop loss order and profit order do not get hit by the close. Again, my broker allows me to make these "contingent" orders, which means he ties them all together and when one gets executed, he cancels the remaining orders. I know not all brokers allow this and certainly, not all electronic platforms allow this, so if that's the case with the broker you are working with, you'll have to be a bit more "hands on." Let's see how the market is treating our position:
http://www.medianline.com/images/550_mar292005k.gifClick To Enlarge
The next bar is a wide range bar lower and it breaks through and closes below the up sloping Median Line Parallel. Price is now near our profit order but the session is nearing an end! I call my broker and snug my break even stop loss order to a stop profit order at three ticks above the high of the prior bar, which is at 1181.75. No matter how the session ends now, we'll end up with two profits from two Energy Coil range trades. IF you can identify the Energy Coils, they can be profitable and fun to trade. Unfortunately, if you cannot identify them , you can get chopped to pieces in these ranges. One key thing to remember: It is a range until it is no longer a range. Let's see what the next bar brings us:
http://www.medianline.com/images/550_mar292005l.gifClick To Enlarge
The next bar moves lower still, filling our profit order at 1177.25. When we see our price print on the screen, we call our broker and make certain we are filled on our profit order. Then we make certain we are flat. We double check that he has cancelled all our other orders and we make him repeat, "You're flat and working nothing." This is an excellent habit to get into, because it reinforces you to check and double check your position and your working or cancelled orders.
This was a fun exercise in letting the market pick our position for us, once we had set up the potential trade set ups and put the entry orders in the market. I like trading Energy Coils, though it seems I don't trade them as often as I used to. I hope you all find these two examples interesting and informative. If you would like to see the prior two trade examples, which hinge on the same frequencies, they can be found at:
March 23, 2005 Trade Description And Charts
March 26, 2005 Trade Description and Charts
I wish you all good trading!
Act, don't Re-act!
Mar. 30, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_mar302005a.gifClick To Enlarge
March 30, 2005 Comments: After the gorgeous pair of Energy Coil trades yesterday, I wondered what the market would offer us today...And doing my pre-market work, as I eyed the 60 minute chart above, I'll tell you now, I really started to get excited. Sometimes, you can just feel the energy brimming over in a chart and for me, the 60 minute chart just looked like this market was about to make a major move after yesterday's beautiful Energy Coil trading. Note that the comment I made in pink, which is another very astute comment I picked up from Rich Dennis many years ago when we both spoke at a private trading seminar: When you see the longer-term charts start to leave unfilled gaps in the direction of the trend, remember that AT LEAST half the move is yet to unfold. As I marked up the charts before the opening, I was really pretty certain what I'd see when I switched to a lower time frame. But let's take a look together:
http://www.medianline.com/images/550_mar302005b.gifClick To Enlarge
The market opened as I was finishing up my marked up fifteen minute chart. You can see that it re-tested the bottom of the Energy Coil, which I added in for these charts in pink, on the open and then began to climb higher. But after looking at the longer-term charts, I wasn't interested in trying a long position today. I had a very strong feeling that if price couldn't break above the string of overhead resistance it faced yesterday, it was going to find a great deal of down side energy today. And as I finished drawing in the lines, the last thing I marked was the Energy Point, which came in right at 1183. What's an Energy Point? It's more than simply confluence. There are so many lines of force converging on one single area, it is literally a price magnet. Price is drawn to these points, and generally, a change in direction then occurs at these points . As I added that Energy Point, I knew deep inside we'd see that price and I was very certain that the Energy Point would be the kick off to a major down move for the day.
This specific Energy Point has not only the lines shown converging at that area, but for those of you that want to see the other forces "at work," go back and review the past three sets of trades I've posted here, using this same down sloping green Median Line set, and you'll see layer after layer of force at work just around 1183. It's obvious to all of you now that I want price to make it up to 1183 so I can get short, so let me lay out the trade set up on the next chart for you:
http://www.medianline.com/images/550_mar302005c.gifClick To Enlarge
Looking at this next chart, you can see I've outlined a plan for getting short at the Energy Point, if price gives us the opportunity. My limit sell order to get short is at 1183. My stop loss is three ticks above the swing high from several days ago at 1185. And my profit target is a test of the longer term Lower Median Line Parallel. Looking at the first chart, this comes in at roughly 1168.00, which is where I'll work my initial profit order. Note that there is also a long term Fib Projection at the 1171 area, but remember that we tested the 1172 area, so I expect that if 1172 gives way, there will be resting stops below there that will help accelerate price lower. I call my broker and enter my limit sell order at 1183 and my initial stop loss order at 1185.
I am risking two S&P points to make a potential 15 S&P points. The risk ratio is too high to even bother to calculate. This will either be a "falling off the log" trade that comes along every once in a great while when you are in tune with a market or I will get stopped out for a two point stop and go back to the drawing board. Now that we have a plan, let's see what price does next:
http://www.medianline.com/images/550_mar302005d.gifClick To Enlarge
Three bars later, price hits the Energy Point almost perfectly on cue! We're short at 1183 and price closes a bit below our entry price, in the lower half of its range. As I see our price print, I call my broker and make certain I am filled on my short entry. Then I double check that he is working my initial stop loss order at 1185. Now let's see what price has in store for us:
http://www.medianline.com/images/550_mar302005e.gifClick To Enlarge
Price moves lower but then leaves a double bottom when the next bar closes. As I watch the third bar close, I note that all three bars have been narrowing in range and I decide to snug my stop up just a bit, in case price makes a run to new highs. I decide to move my initial stop loss down to three ticks above the high of the day , so my new stop loss order is now at 1184. Let's see if price takes us out with a quick one point loss or continues lower:
http://www.medianline.com/images/550_mar302005f.gifClick To Enlarge
The next four bars are lower and all of about equal range. This is looking better, but even though I feel better about the trade, I move my stop closer, now down to break even. We have four points in this trade now and there is no sense in letting it turn into a loser. Where is price headed now?
http://www.medianline.com/images/550_mar302005g.gifClick To Enlarge
Price accelerates to the down side, blowing through the blue up sloping Lower Median Line Parallel and closing well below it. Things are looking great. I snug the stop again, this time to three ticks above the double tops left at 1181, so our stop loss order is now a stop profit order at 1181.75. Where to now?
http://www.medianline.com/images/550_mar302005h.gifClick To Enlarge
Now we're in the danger zone...Price spikes lower, running through the bottom of the Energy Coil, but manages to close just above it. And the next bar spends most of its time above the bottom of the Energy Coil and closes above it, though it does close unchanged and in the lower third of its range. We have quite a bit of profit in this trade and the last thing we want to happen is watch it evaporate if price is going to stay within the Energy Coil--Remember what I said yesterday about getting chopped to pieces by not paying attention to Energy Coils? I snug my stop closer again, this time to three ticks above where price would intersect with the recently zoomed blue up sloping Lower Median Line Parallel. The intersection comes in at 1176.50, so our new profit stop is at 1177.25. At this point, I feel that we'll either get stopped out for a nice profit in the next two bars OR price will again accelerate to the downside. I doubt we'll consolidate down here for long. Let's see what happens:
http://www.medianline.com/images/550_mar302005i.gifClick To Enlarge
Price moves back below the bottom of the Energy Coil during the next bar and then makes a new low in a wide range lower bar, closing near its lows. I like what I see, but again, I snug my stop, this time to three ticks above the mini swing high just above the bottom of the Energy Coil. If it turns into a long consolidation here, I don't mind getting profit stopped out. The mini swing high is at 1176, so our new profit stop is at 1176.75.
http://www.medianline.com/images/550_mar302005j.gifClick To Enlarge
We make a new low and touch the green down sloping Lower Median Line Parallel before turning higher for the next two bars. Price then turns lower again and although the last bar makes a new low for the move and again briefly trades below the green down sloping Lower Median Line Parallel, it closes in the upper third of its range and above the green Lower MLH. I snug our stop again, this time to three ticks above the mini swing high just made , which gives us a profit stop now of 1174.25. We're getting tantalizingly close to our profit target and it's tempting with every up tick to take the money and run, but I'll stick with the original plan and see if price can make it down to test the longer term support before we get profit stopped out:
http://www.medianline.com/images/550_mar302005k.gifClick To Enlarge
Price makes a new low, driving right through the longer term support of the Lower Median Line Parallel and getting us out at our profit target of 1168. Note that I *could* have lowered the target a bit, because it is a down sloping line, but that would have been fighting over a half point. I'd rather let the market just run through my order just above the potential support. Once I see my price print, I call my broker and make certain I am filled on my profit order. I then double check that he has me flat on the day now and that all of my orders have been cancelled. I make him repeat: "You're flat and working nothing." It's a good mantra to repeat at the end of each day.
This was a fun trade for me, because I don't usually get so escited when marking up charts as I drink coffee in the pre-market hours. And of course, its always fun when you set out a nice plan and it unfolds just as you saw it in your mind's eye. I hope you all find this example interesting and informative. If you would like to see the prior three trade examples, all which hinge on the same frequencies, they can be found at:
I wish you all good trading!
Act, don't Re-act!
Apr. 1, 2005Previous Archive Next Archive
http://www.medianline.com/images/550_apr12005a.gifClick To Enlarge
April 1, 2005 Comments: Doing my pre-market work this morning, looking at the charts, the simplicity of some of Dr. Andrews' original teachings rang true to me: "Price seeks and tests the Median Line or its Upper or Lower Parallel 80 percent of the time." Now remember, he was working with daily and weekly charts, not the one minute or multi-tick charts so many traders are operating on these days when they day trade. That isn't to say his statement doesn't hold truth in the intra-day trading world of today , but just to remind you that these tools were developed with longer-term data, compared with what many traders look at today when they approach trading futures. So many people just beginning to trade write me, asking me if they should chart the 1 minute and 3 minute bars when they trade E*Mini S&Ps, for instance, and my general reply is that while these lower time frames do offer more "action," that additional action comes at the cost of amplifying the noise . Most traders attempt to trade at these lower time frames because they believe it will allow them to use smaller stops. But day after day, I show set ups that rarely use stops in the E*Mini S&Ps larger than 3 points, and these set ups are always shown on fifteen minute charts, unless I pull back to give a longer-term view and show the sixty minute or daily charts along side the fifteen minute charts that I generally trade from. I think that by only working with these lower time frames, most traders miss the frequencies that price shows them on the longer-term charts.
On this morning's first chart, you can see that I used a 60 minute chart, which is generally the first chart I look at when starting my morning work. After the markets close, I update my daily and weekly hand drawn charts and when I do this, I write small notes for the markets I am following, noting anything I might find helpful for the next day's trading that I found on those longer-term time frames. The note I wrote yesterday told me to keep an eye on the red Median Line and its Upper and Lower Parallels, because price had been in tune with this Median Line set from the very beginning and had tested it several times. You can see that I highlighted on this 60 minute chart where price had tested both the Median Line and also the Lower Median Line Parallel. But if you let your eyes wander back to the very beginning of the Median Line, about fourteen bars after Pivot B is marked, price tested the line that forms the Median Line. And similarly, after the C-D Line is drawn, within the first twenty or so bars, price tests the same Median Line again. And each time, it held price, suggesting that this line would exhibit the frequency that price would move forward with. And on March 16, you can see the gap lower opening and the subsequent zoom and re-test that worked like a charm. All of these point to a set of lines that are capturing the movement of price. And they made me write this small note to myself to pay attention to this set of lines as price unfolded.
http://www.medianline.com/images/550_apr12005b.gifClick To Enlarge
Looking at this fifteen minute chart, you can see that if you don't have pre-market quotes, it's not clear just where price is headed on the opening bell. We had a beutiful test of the red Major Lower Median Line Parallel and then several days of price climbing higher, attempting to make it back to that red Major Median Line, which Dr. Andrews suggests will happen 80 percent of the time. But the blue up sloping Median Line and its Upper and Lower Median Line Parallels are not necessarily giving off the same message. Price DID rally all the way back up and into that blue Median Line set, but during the two day rally , they were unable to test the blue up sloping Median Line and they left double tops at 1188, before finally closing back below the blue up sloping Lower Median Line Parallel on Thursday afternoon. Does this invoke Hagopian's Rule? Perhaps. On the one hand, you have the failure of price to test the blue Median Line of the lower time frame Median Line set and on the other hand, you have price being attracted to the red longer-term Median Line and making it 80 percent of the time. How in the world do you sort out this conflict? You let price sort it out, of course. You try to have an open mind to both sides and watch to see how price plays out its hand. It's often amazing how price finds a way to reconcile the seemingly irreconcilable...Let's see how this market opens:
http://www.medianline.com/images/550_apr12005c.gifClick To Enlarge
Price gaps open higher, nearly testing the red down sloping Major Median Line. Although price hasn't "officially" tested the Median Line, price has pretty much fulfilled its tendency to test the line 80 percent of the time, at least in my mind. But this begs another question: Now that price has gapped open higher, above the blue up sloping Lower Median Line Parallel, if price turns lower from here without testing the blue up sloping Median Line, IS the Hagopian Rule invoked now? I'd say yes, if price was then able to break back down below the same blue up sloping Median Line Parallel. And so we are left again with questions. But this will always be the case if you take the time to ask, "What if..?" as price unfolds before you.
And there is another possibility, much closer at hand, that I haven't mentioned yet. Price NEARLY zoomed the red Major Median Line. Several of you have asked recently on the forum, "What's a Zoom?" The classic zoom is a wide range bar that "runs" through major support or resistance "like a hot knife through butter," as they used to say and closes above or below, in the direction of the zoom, that major support or resistance. And zooms are important because one of the first tenets of Dr. Andrews' teachings was that when price zooms or gaps through a Median Line or one of its parallel lines , expect price to come back to re-test that area. And that statement spawned a study of price and the development of a high probabilty entry technique called the "zoom and re-test."
The basic idea of the Zoom and Re-Test is that once price zooms a major line, expect price to come back to test it. And you can then take advantage of the re-test of this zoomed line by taking a position in the direction of the zoom as the re-test occurs. This trade is profitable about 77 percent of the time, which makes it a very important trade set up to put in your tool box, IF you can master it. When I trade them, I like price to make a clear move above or below the line just zoomed--I don't like them as well when price just touches the line or just peeks above or below it, because that's often just the noise inherent in that market at that time. But if price has made a clear move through the line, in one swift move, I generally consider that a zoom. My second caveat is that I don't like price to take TOO long to re-test the line that was just zoomed. For example, if price zoomed a Median Line during the first bar of the day, I would NOT consider a move back to re-test it late in that same afternoon a reliable re-test entry opportunity. I find that if these set ups are going to work, they should be quick, clean and obvious. Now the question is: Will price zoom the red Major Median Line? Let's let price tell us what it has in mind:
http://www.medianline.com/images/550_apr12005d.gifClick To Enlarge
Looking at this next chart, price answers our two questions in one single bar: It tested the blue up sloping Median Line, so we no longer have to worry about Hagopian's rule. AND although price ran UP through the red Major Median Line, it closed BELOW the red Major Median Line. So in both cases, price has met its up side requirements and indeed, according to what we know about the expenditure of energy, when price tested the blue up sloping Median Line, it most likely expended its remaining up side energy by testing it's "most probable line." And by closing below the red Major Median Line that it attempted to zoom, it set up another classic trade set up that has been discussed here, but has apparently caused some confusion: A Zoom Failure.
My attention to failures most certainly can be attributed to the work of a friend, Joe DiNapoli. His penchant for seeing and trading price "failures" as price formations unfold and then fail to perform as expected is explained over and over in his writing and lecturing. His "Rail Road Track" set up is one of the clearest "failure" trade set ups I can point to and when I see one unfold before me on a chart in real-time, I know *exactly* how to trade the failure set up, because Joe did such a good job of studying these set ups and then explaining them to his students.
Of course, there are other popular "failure" set ups: Another that immediately comes to mind would be the "Turtle Soup" set up, where price breaks through the 20 day high and trades back below it. This particular trade set up was developed by several traders to take advantage of the hordes of traders copying what they thought was the methodology of the famous Turtle Traders, mentored by Rich Dennis. The thought behind the failure set up was that as price broke above the 20 day high , thousands of trend following traders would jump on the trend break out, going long with a move through new 20 day highs . And then, once in these new positions, taken at new highs for the move, IF price fails to continue in the direction of the trend, these same thousands of traders would be stuck in losing positions with poor trade location. And so the Turtle Soup entry would be to go against the trend once price broke back some percent or amount below the recently made high , with the belief that many of these new positions with poor trade location would then get stopped out, pushing price in the direction of the Turtle Soup entry.
But let's go back to discussing the Zoom Failure. Once price zooms through a Median Line or its Upper or Lower Median Line Parallel, it must close past that line, in the direction of the zoom, or it's a failure. And again, the wider the zoom bar, and the greater the failure, the better the set up. In this case, we have a nice wide bar. It also tests the blue up sloping Median Line, where we think it expended the last of its up side energy. And it closed not only back below the red Major Median Line it zoomed to the upside, but the bar closed lower than it opened. In every measure, this zoom set up was a failure. Now how do we exploit this failure?
The zoom failure set up is simple, once you've found a clear failure: In this case, price tried to zoom the red Major Median Line to the up side and failed, closing below it. The entry point would be a re-test of the red Major Median Line, which has again become Major resistance. So we'll sell any re-test of the Red Median Line. And our initial stop on this trade set up? The best place to put your initial stop on this trade is three ticks above the high of the day, just made during the prior bar, when price tested the blue up sloping Median Line. A move to that level would have to break back above the red Major Median Line AND the blue Median Line AND the high of the day, all of which now act as resistance. The high of the day has been 1193.50, so the initial stop loss on this trade would be three ticks above that level, at 1194.25. And I calculate the re-test of the red Major Median Line to come in at 1192 for the next bar. So even though we are dealing with relatively wide range bars, the initial risk on this trade would be only 2 1/4 S&P points.
And what about the Logical Profit Target? Strictly speaking, using the same logic we used when approaching the market BEFORE the open, price should now be headed back to test the red Major Lower Median Line Parallel. IF we get filled on our entry order and then price turned lower, there would also be some preliminary support at the blue up sloping Median Line Parallel, which comes in at roughly 1186. And there would be nothing wrong with taking all or some of your profits as price tested that area, since price respected the blue Median Line. But another thing about failures that Joe DiNapoli so artfully pointed out was that failures often set up "spectacular" moves in the opposition direction, and thus they are very attractive trade set ups to master and trade. Like Hagopian's Rule, when I see a failure setting up, I am generally thinking that IF the failure set up works, the pay off will be a very good one, and so I generally look for moves of large magnitude. So to begin with, I'll keep the red Major Median Line Parallel, all the way down around the 1167 area as the area of support in the back of my mind and for now, I'll mark that as our profit target. And if you look at the chart carefully, you'll see that unless price is contained by the blue up sloping Median Line Parallel, there isn't much support: Price will be in open space. But let's deal with that IF price allows us to get short in the first place. There is no reason to do a risk reward calculation, because it is a such a favorable number, even if we took our profit at 1186. Now let's see what our orders look like on the fifteen minute chart:
http://www.medianline.com/images/550_apr12005e.gifClick To Enlarge
The orders look correct. I call my broker and enter an order to sell E*Mini S&Ps at 1192 and I also enter an inital stop loss order at 1194.25. Remember, because price is currently trading below my entry point, I can have him enter *both* orders at the same time, because by definition, my stop loss order cannot be filled unless my limit sell order is filled first. Now we're ready to see what price has in store for us:
http://www.medianline.com/images/550_apr12005f.gifClick To Enlarge
Price turns up a bit and tests the red Major Median Line, getting us short and briefly peeking above the red Median Line before turning down hard. As I see my price print, I call my broker and double check that I am indeed now short E*Mini S&Ps at 1192, and then I double check that he is working my initial stop loss order at 1194.25. And then I put in my profit order at 1166, making it contingent on my stop loss order by telling my broker that they are "OCO Orders," which means if one is filled, immediately cancel the other order. This bar is the widest of the day, closing quite a bit lower than it opened and in the lower third of the bar. All of this should be good news for our new short position, but we *always* have logical stops in the market in case the unexpected happens. It only takes one nasty surpise during a trade when you got lazy and didn't place that stop order because "things were looking so good" to wipe out your trading account...
Now it's probably just about time to find out if price finds support at a test of the blue up sloping Lower Median Line Parallel:
http://www.medianline.com/images/550_apr12005g.gifClick To Enlarge
The next bar is also a wide bar lower and this bar zooms through the blue up sloping Lower Median Line Parallel. Before someone asks on the forum, it WOULD be appropriate to enter at a re-test of this just-zoomed Lower Median Line Parallel, if price hadn't allowed you to get short by re-testing the red Major Median Line or if you wanted to add to your position at a high probability area. As I have said before, I rarely add to a position, and I only do it if that was part of my original trading plan and I am scaling in to a position piece by piece. But that's my personal trading style and many traders routinely add to their positions at high probability areas, and this would be one.
As you can see, the next bar is a small range inside bar that closes higher. It did not re-test the Lower Median Line Parallel. The following bar is a wide range bar that makes new lows for the day and closes in the lower third of the bar. This bar also did not re-test the Lower Median Line Parallel, so there was no zoom and re-test sell opportunity. The last bar in this series makes another new low but closes higher than the previous bar and also higher than it opened. This bar closes at 1181.25, which means we have over ten S&P points in this trade as this bar closes and the initial stop is 13 S&P points above the current price level.
When I see how far we have come in such a short period of time, I look carefully at the prior bars to see if I can snug up our initial stop loss closer to the current price action without snugging it so close that it will be in danger from the inherent noise of this market. Looking at the prior two days, and reading what I said at the beginning of this post, you'll notice that price left double top highs at 1188 yesterday, and I draw a line connecting these double tops and project it to the right . I cancel our initial stop at 1194.25 and enter a profit stop three ticks above these double stops, at 1188.75, which would be a move above both the up sloping blue Lower Median Line and a move above these double tops. We are now still short and playing with the market's money, meaning that even if we get stopped out, we'll book some profits. In my mind, it would be a sin to let a ten point S&P profit turn into a loss. And the *only* way to make certain this won't happen, is to physically change the stop loss order I am working in the market. Believe me, too many traders find it impossible to pick up the phone and change that order as price starts climbing back up quickly...They "freeze" and watch, hoping that price will turn on a dime and "save them" from being stopped out at a loss. The simple truth is that if you decide it's time to make certain a profit won't turn into a loss, physically change the stop order you are working. Pay careful attention to detail and if you can, take the emotions out of the trade, when possible. Let's see where price heads now:
http://www.medianline.com/images/550_apr12005h.gifClick To Enlarge
The next bar is an inside narrow range bar that closes higher. This is followed by another relatively narrow range bar that moves higher still, but then closes lower than the prior bar. Then another narrow range inside bar forms and that reminds us that price is re-storing energy before making its next move--either up or down.
The next two bars move lower, with the second bar making a new low for this move and closing near its low. As this bar closes at 1177.50, I look for a logical place to snug up our profit stop, since we now have nearly 15 S&P points in this trade. The swing high formed three bars back is at 1184, so I snug our profit stop down to 1184.75, three ticks above that swing high. Remember, we are in "open space" here, and unless price makes a straight run lower to test the red Major Lower Median Line Parallel, there's little to point as support and resistance. But we want to protect *some* of these profits while trying to keep the protection far enough away to stay out of the noise inherent in this market. Like most things in life, this is a personal balancing act and no two traders would always choose the same stops or move their stops in the same manner. My thoughts are that I have now assured that I will book nearly 8 S&P points and the stop profit I chose should still give price some room to run, if price still has more down side energy left to expend.
And in fact, isn't that the question? DOES price still have further down side energy to expend? This is the biggest thing on my mind as I snug up my profit stop, so I take *another* look at the fifteen minute chart. Does price still have downside energy to expend? What tools do I have to project price's energy potential at any given time? I *could* draw in a down sloping Median Line and its Parallels, but they would be untested, so they might or might not give me the frequency I need to measure where price is likely to have expended its down side energy.
http://www.medianline.com/images/550_apr12005i.gifClick To Enlarge
Instead, I add the 1st Warning Line, which is a line parallel to the Median line, and drawn below the Upper and Lower Median Line Parallels, at the same distance as the Median Line Parallels are drawn from the Median Line. Remember that price tested this blue up sloping Median Line right at its high, so this Median Line showed us exactly where price had expended its up side energy. I have little doubt it is vibrating to the same frequency as price.
But price has already closed below the 1st Warning Line. That's OK. I know that these frequencies repeat in multiples, like sine waves that can double or triple in magnitude, but still show the same harmonics as the original sine wave but at a higher pitched frequency. In music, these higher levels are called "overtones" and you can sometimes hear them when certain chords are played in perfect pitch, meaning the frequency of the sound is projecting not only the original sound but also multiples of the original sound. So using this principle, I add the 2nd Warning Line, which also carries the frequency of the original blue up sloping Median Line and its Parallels.
And to be thorough, I take another close look at the recent history of price action: Although we saw one spike lower to test the red Major Lower Median Line Parallel, price has found support in the 1171-1173 area. You can see I added in two lines from two such areas of support, an open gap and a double bottom.When I project these lines to the right , you can see they form a confluence with the 2nd Warning line.
I now have two ways to play out this trade: I can either stay with the original profit target, which is a test of the red Lower Median Line Parallel at roughly 1166 or I can move my profit order closer to the action, to the confluence I just outlined. In the past few days, you've seen me manage day trades by constantly snugging down stops and keeping my original profit targets, using a MOC stop order as the session close approached. I was stopped out on the close during one of those trades, and that was just as the trade was planned. I gave that trade every chance to run as far as it could and I was rewarded and protected nicely by using the MOC stop nicely, even though price didn't make it to my original profit target that day before the close. Or I can change my order to reflect the confluence that I outlined above and move up my profit order. Either choice is fine. Again, this is a balancing act and each trader will approach these situations differently. And on a different day, *I* may make a different choice.
In this instance, I choose to snug my profit stop closer to the current price action. I calculate that the 2nd Warning Line comes in around 1172.50 and I also have the two lines of support in that same area. I choose to change my profit stop and snug it up to 1173.25. I call my broker and change the profit stop and remind him that it is "OCO" with the stop loss order he is watching for me. Now let's see where price takes us:
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Price moves lower in an orderly fashion and I am filled on my profit order six bars later. As I see my price print, I call my broker and make certain my profit order was filled and that I am flat. I also check that he cancelled all my working orders and make him repeat my normal trade ending litany: "You're flat and working nothing." I went short at 1192 and was filled at my profit order at 1173.25, for just under 19 S&P points on the day. Just out of curiousity, let's see what price did the rest of the day:
http://www.medianline.com/images/550_apr12005k.gifClick To Enlarge
You can see that the area of confluence acted as strong support. But that isn't such a great surprice, when you consider price gapped open quite a bit higher and then traded more than twenty S&P points off of its high. At some point, price *WILL* expend all of its energy in one direction, and that is the basic premise behind Median Lines: Trees do not grow to the sky!
This was a very profitable trade and a very interesting trade set up. Many components came into play and I hope it answered many of the questions asked recently on the Median Line Forum regarding "Zoom and Re-Test" set ups and "zoom Failure" set ups.I hope you all find it interesting and informative, and I wish you all a great weekend!
Act, don't Re-act!
Apr. 4, 2005Previous Archive Next Archive
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April 4, 2005 Comments: Looking at the charts before the opening, I first noticed two things: Price had recently tested the red longer term Median Line and had just tested the red longer term Lower Median Line Parallel. And though the chart, in general, looks like this run lower may not yet be finished, because price tested the Lower Median Line Parallel and has now bounced back higher, until proven otherwise, it is headed back to a test of the red Median Line . After Friday's large gap higher opening and large run lower, before the opening, I expected a quieter type of day. And in fact, I was hoping for a test of support, so I could attempt a long position if I could find an area with a low risk entry area. Let's see how the market opened:
http://www.medianline.com/images/550_apr42005b.gifClick To Enlarge
Prices open a little lower and continue lower for the first four bars, before forming what looks to be a pivot low at 1170.75 on a narrow bar. As the next bar unfolds, it is a wider range bar higher, and when it closes, I add a new Median Line set and begin looking for an area to attempt a long position. The next two bars are higher as well, so perhaps I won't find the trade area I am looking for. But what would I like to see?
If you remember back to Friday's action, the 1171-1172 area held a great deal of confluence and support. And we climbed out of this same area quickly again this morning. Ideally, I'd like to buy a re-test of the up sloping Lower Median Line, with a stop just below the lows made earlier this morning at 1170.75.Eyeing the Lower Median Line I just added and doing the math, I'd love to get long at the intersection of price with the Lower Median Line Parallel, which would be at 1171.25 and then place my initial stop loss order at 1170, which would be three ticks below the morning's low. If price made new lows now, the idea would most likely be wrong--And I always like to minimize losses. The initial profit target would be a test of the Median Line I just added, which currently comes in at roughly 1182. To size up the risk reward ratio, I'd be willing to risk 1 1/4 S&P points to make 10 3/4 S&P points, which is a risk reward ratio of over 7...enough said.
However, it is important to note that this trade set up DOES NOT carry anywhere near the 75 to 80 percent success probability of the trades often shown here. Because we would be trading off of Median Line sets that hadn't been tested, I'd rate the probability of success at something more like 55 to 60 percent. But with the small stop loss involved and the gawdy risk reward ratio, this is still a trade I'd take, IF the market gives me a chance to take the entry. Let's see how it looks on a chart:
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Ok, the orders look good, so I call my broker and place the entry to get long at 1171.25 and I also put in the initial stop loss order at 1170. Remember, because price is trading above these prices, I can put both orders into the market because by definition, price cannot hit my stop loss order without first hitting my entry order.
And before someone writes on the forum, asking about the support often found at "natural numbers" like 1170, while there is some credence to that thought the first time they are tested, I'd suggest that since we have recently been below the 1170 area and since we also have such a nice heavy area of support at 1171-1172, IF price breaks below the morning's lows, we'll find stop loss orders, not buying orders, as traders scramble to get on board for a ride to new lows...Now let's see what the market does next:
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Price DOES trade lower for the next three bars and I am SURE I am going to get filled on my entry order at 1171.25, but the low for the last bar is 1171.50 and the bar closes at 1172.25. My entry order was missed by one tick! Did I try to cut it too close? I don't want to chase price, but I also don't want to be "left standing at the station while the train pulls out," as they say. I make a quick assumption and draw in a new blue up sloping Median Line set. Then I calculate where price would intersect with it's Lower Median Line Parallel during the next bar and that comes in just below 1171.75. Because the initial stop loss is so close, I decide to move that up a touch and call my broker. I change my limit buy order to 1172, but I leave the initial stop loss order at 1170. So now I am risking 2 S&P points to make 10 1/4. There's nothing wrong with that. But will price trade back down and test the blue Lower Median Line Parallel or is it already heading higher, leaving me empty handed?
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Price does come down just a bit during the next bar, making a low of 1171.75 and getting me long at 1172 before spiking higher and closing near its highs. The low of this bar was one tick below my order! Sheesh! Once I see my price print, I call my broker and make certain I was filled on my entry order. Then I double check that he is working my stop loss order at 1170. Now I add a profit order at 1182.25 and tie it to my stop loss order, making them "one cancels the other," or OCO. This means that if one of them gets filled, the other is automatically cancelled by my broker. Now let's see where price goes next:
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Price makes another wide range bar higher, testing the blue up sloping Median Line but just closing below it. The next bar is a bit smaller in range, but not so small as to concern me and it makes new highs as well, though again, it fails to close above the Median Line after briefly peeking above it. The next bar is again a wide range bar and this one again makes new highs--and closes above the Median Line, in the upper third of its range. So far, things look good for this position. This bar closed at 1179, so we are just a touch more than 3 S&P points from our profit target.
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The next bar also makes a new high and if you look closely, the prior wide range bar has a lower low than the bar before it, as well as a low that is below the current bar. I file that away for a moment as a potential mini swing low, because we are at the point where I'd like to be snugging my stops closer to price action.
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It doesn't take me long to decide to snug my stops up. I move them up to three ticks below this mini swing low. The low of that wide range bar serving as the mini swing low was at 1176.50, so this now gives us a profit stop of 1175.75. I am now playing with the market's money and if my profit stop is hit, I'll at least take in 3 3/4 S&P points...Let's see what the market does now:
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Price makes another new high, well above the Median Line but the best the next bar can do is re-test that high, before closing lower, below the Median Line and in the lower third of its range. Just as I start to worry about the double tops that are now left above the Median Line, price spikes higher again, making a new high at 1181.25 as it easily takes out the double tops. But price does close back below the Median Line, and this bar has the same low as the prior bar, leaving me with double bottoms at 1179 to contend with.
We came tantalizingly close to our 1182.25 profit target, so again, I am unwilling to give back much of this potential profit. And remember that I said at the beginning of this piece that I expected a quiet day, with SOME up side movement, so I don't expect we'll see another ten points to the upside. I am trying to drag as much profit out of this range as as I can. In response to the double bottoms at 1179, I call my broker and snug my stop profit order to three ticks below the double bottoms, at 1178.25. This order is dangerously close to price action, and I realize that. But if I get stopped out, I'll still have booked 6 1/4 S&P points. I don't want to see these profits evaporate if price turns on a dime and heads back down to test either of the Lower Median Line Parallels as the session gets nearer to its end.
http://www.medianline.com/images/550_apr42005j.gifClick To Enlarge
Price comes closer still to our profit target, making a new high at 1182 and missing my profit order by one tick! This is one of those days where each tick makes a difference, as the size of the daily range contracts. As this bar closes, I call my broker and add a "Market On Close" stop order, meaning that if I don't get filled on either my profit order or my stop loss order, he'll take me out of this position on the close and automatically cancel the other two orders. Under no circumstances do I want a day trade to turn into an overnight position.
http://www.medianline.com/images/550_apr42005k.gifClick To Enlarge
The next bar runs through the blue up sloping Median Line, making a wide range bar lower and closing in the lower third of its range. It misses our profit stop by one tick . The last bar of the session is coming up and there's really nothing for me to do here, other than see whether I get stopped out at my profit stop at 1178.25, or if price rallies up to take me out at my profit target at 1182.25 or if my broker ends up stopping me out for a profit on the close. I can do nothing but watch:
http://www.medianline.com/images/550_apr42005l.gifClick To Enlarge
Price does not go any lower in the final bar and though it rallies, it doesn't make a new high. My broker takes me out at the close, at 1180.25. As the market closes, I call my broker and make certain he took me out of my position and that I am flat. Then I double check that he cancelled all orders. As a triple check, I make him repeat my mantra: "You're flat and working nothing."
I net 8 1/4 S&P points on the trade and that's a good day's work. This was not a "pretty" trade or one that relied on anything other than nimble thinking and good money management practices. Not every trade, win or lose, will be built on wonderful trade set ups that carry 75-80 percent success rates. And many days, you'll find yourself in markets where one tick CAN make a difference between getting into a trade and watching the train leave the station as you're standing there...And that's where nimble thinking comes in and constantly making yourself ask, "What if...?" And of course, in markets where one tick seems to make a difference at every key junction, you sometimes feel like there's some luck involved in pulling out profits. But then, many experienced traders say you make your own luck, by preparing yourself to think quick and react quick and by gaining more experience each time you view the markets.
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!
Apr. 7, 2005Previous Archive Next Archive
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April 7, 2005 Comments: After a nice run of trades in the E*Mini S&Ps, let's move back to the currencies today. Looking at the Euro FX futures before the opening , you can see on the 15 minute Euro FX Global 24 hour session chart that price is in a nice up trend. If you were looking at a day-session only chart, you'd see that price was poised to gap open higher by about 40 ticks. And looking at the chart above, there's no high-probability trade set up in sight. Let's see if we get a better idea once the market opens:
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Price climbs higher after the opening, testing the blue up sloping Median Line several times before finally closing above it. But look carefully at the wide range bar that finally closes above the Median Line: Price is testing the prior spike high made much earlier in the morning and a failure at this level will leave double tops, which could signal a potential sell off in price.
And looking at the next bar, you can see that price failed to break and hold above that early morning high and then plunged lower, closing well below the blue up sloping Median Line. And since price left the double tops and more important, didn't test the Upper Median Line Parallel, we can look to Hagopian's rule here for direction: I expect a further sell off as the day unfolds. Can we identify a solid trade location that will offer us good risk reward?
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The first thing I do is use the just-made high at the re-test of the prior top as a pivot and add a red down sloping Median Line set, to get a clearer picture of the slope implied by the current set of three alternating pivots. Remember: The Median Line will give me the slope and the Upper and Lower Parallels will give me the areas where price should run out of energy. Now let's see if we can diagram a solid trade set up:
http://www.medianline.com/images/550_6e04070515slide4.gifClick To Enlarge
My eyes are immediately drawn to the area where the blue up sloping Median Line intersects with the red down sloping Upper Median Line Parallel. Is this an Energy Point? To me, it's not a classic one, because there aren't enough confluence inputs--And I've just drawn in the red Median Line set, so I'll just think of it as a very nice area of confluence. I am *hoping* it acts like an Energy Point and attracts price, letting us get short before price is turned back down by the overhead resistance. So we'll put in an order to sell Euro FX futures three ticks below this area of confluence. I make the confluence point out to be 129.56, so our limit sell order will be at 129.53.
The initial stop loss order is simple: I'll put it three ticks above the morning's high, which was 129.62, so our stop loss order will be at 129.65. Our initial risk on the trade will be 12 ticks.
Since price traded nicely above the blue up sloping Median Line yet failed to test the Upper Median Line, we can invoke Hagopian's Rule, which means we are now looking for an extended move in the opposite direction. Because of this failure by price to test it's "most probable" line to the upside, it's more than likely it will now run through its first "most probable" line to the down side. Normally, I'd consider the blue up sloping Median Line Parallel as the first profit target, but in this case, I expect price to run quite a bit further. Instead, I suspect price will test the red down sloping Lower Median Line Parallel, before this run is finished--assuming it has enough time during the day session. So that will be the profit target. I estimate that the intersection with this Lower Median Line Parallel would occurr at roughly 128.70, so that will be my initial profit target. I can fine tune the level as price unfolds if that's needed.
We're risking 12 ticks on this trade to make a potential 83 points. The risk reward ratio on this trade is nearly 7. And in terms of probability of success, while this trade set up does not have the near 80 percent success as the zoom and re-test set up, these failures at prior tops tend to also have a very high probability, one that I rate above 70 percent. The only problem is: Will price retrace back high enough to allow us to enter the trade?
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Price makes a new low during the next bar and also closes lower, nearly testing the red down sloping Median Line. But the next bar reverses higher and closes near its high. And then finally, the next bar just touches the area of confluence, getting us short at our price of 129.53 on the way to making a high of 129.55, before turning back lower. In fact, this bar is nearly the mirror image of the prior bar, closing on its lows. This is a classic sign that price has expended its energy on its run higher--And price ran out of energy right where the Median Lines told us it would.
Details, details, details: Again, as I see my entry price print, I immediately call my broker and check that my limit sell order was filled. Once he confirmed the fill, I double check that my initial stop loss order is in the market at 129.65. Then I give my broker a limit buy order at 128.70, my profit order, and I make it "OCO" or "One Cancels the Other" with the initial stop order. Now let's see how price unfolds from here:
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The next bar is a narrow bar that closes higher but the following bar is a wide range bar that makes a new low for the move, breaking below the blue up sloping Median Line Parallel and testing the red down sloping Median Line before turning back higher and closing above both lines. The next bar is a narrower range inside bar that closes higher and its followed by a bar of similar range that closes on its lows, but has the same high as the wider range bar two bars back--leaving double tops. When the ranges narrow like this, especially after price has tested one of the areas where price *may* have run out of its down side energy, I always take a close look at the charts and see if I can possibly snug up my stops. The narrowing of the ranges suggest price is re-storing energy, getting ready for its next move. IF it takes off to the up side with renewed energy, I want to make certain I have at least checked where I am working my stop order, to be certain I am comfortable with the risk.
In this case, I decide to snug my stops closer to the action. The logical choice is to move my initial stop down to three ticks above the double tops just formed. They come in at 129.47, so my order is now a profit stop at 129.50 and a move to this level will be above the resistance formed by the down sloping Upper Median Line Parallel. I call my broker and cancel my initial stop loss order and replace it with this new profit stop. Let's see what happens next:
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The next bar is a wide range bar lower bar that makes a new low for the move and again tests the red down sloping Median Line. *NOTE* that I have marked this chart with comments in pink directed towards those of you that have constantly asked me if there were appropriate places, using Median Line theory, to take partial profits and also add additional units or add back what you have taken off. I generally haven't shown these areas in the examples shown here, because it makes the size of the posts longer and longer, but this was a good example to begin adding these comments, so when I deem it appropriate, I'll show these "scalping techniques" as well. Those of you that do not scale in and scale out of positions, simply ignore the scalping comments shown. I like how price is unfolding and at the moment, I see no need to change any of our orders. Let's see where we go next:
http://www.medianline.com/images/550_6e04070515slide8.gifClick To Enlarge
After the run to new lows and the test of the red down sloping Median Line, price stalls and begins trading in a narrow range. Again, note how effectively the Median Line predicted where price would run out of energy! And once the energy was expended, price needed to re-store energy, hence the Energy Coil formed.
You can see that price formed smaller and smaller bars until at last, it had re-stored its energy. It then made a run higher, breaking above the red down sloping Upper Median Line Parallel and testing the blue up sloping Lower Median Line Parallel that had been zoomed right before the Energy Coil formed. This re-test, especially because it is also confluent eith the red down sloping Upper Median Line Parallel, should be the area where price stalls as it runs out of up side energy--These confluence areas *should* contain the pull-back. And if you look at this bar, you'll see that price closed in the lower third of its range, a sign that price is struggling to make any further headway to the up side.*For scalpers only!* This re-test of the zoomed blue up sloping Lower Median Line and its confluence with the red down sloping Upper Median Line Parallel is a perfect area to either sell out the portion that you took back at the re-test of the red down sloping Median Line test OR to add additional units. If you add back units or net add additional units, the stop would be the same as the current profit stop, three ticks above the double tops, at 129.50. Let's see if price finds this area of confluence too tough to get through:
http://www.medianline.com/images/550_6e04070515slide9.gifClick To Enlarge
The next bar is a very narrow range bar that closes lower. Remember how I feel about narow range bars! I look carefully at the chart again and know it's time to be certain that IF price now gets above the highs it just made when it tested the just-zoomed blue up sloping Lower Median Line Parallel, I don't want ot be in this trade. I cancel my profit stop and replace it with a new one, three ticks above the swing high price just made in the prior bar. The high of the prior bar was 129.40, so our new profit stop is at 129.43. Let's see what price does after this narrow bar:
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This is more like it! Price makes two very large range bars lower. The first bar briefly moves below the red down sloping Median Line, but manages to close above it . But the second one zooms through it and closes much lower, making a low roughly ten ticks above our profit target and again closing in the lower third of this wide range lower bar. So far, price is showing NO sign that it is out of down side energy.
But remember: We always get rewarded by playing, "What if..." as price unfolds in front of us. And as this bar closes, we have more than 60 potential points of profit in this trade. Price *will* run out of down side energy somewhere, since we are NOT going to zero...We have a solid profit target at 128.70, but to protect some of these profits, I snug our profit stop again, this time to three ticks above the high of this last bar. A move above this bar's high will also be a move back above the down sloping red Median Line. And though folks that aren't short may be interested in selling a re-test of this same down sloping Median Line , we have such great trade location now on our entry that we *must* do the prudent thing and make certain we lock in profits IF the unexpected happens. As I've said before, to take all the emotion out of these decisions, the best way to handle that possibility is to keep playing, "What if..." and snugging stops where it's appropriate, because so many traders freeze when the unexpected happens and watch trades that were just full of juicy potential profits turn into losing trades. And that is a sin.
The high of this last bar is 129.05. That's also the close of the prior bar. Our new profit stop is now at 129.08. When you look on the chart, you'll see that even if the 129.01 area IS a potential zoom and re-test sell area, a move above the close of this last bar, especially one that makes it to 129.08, has taken out some solid overhead resistance and a zoom and re-test entry in this area might be a loser if price made it this high...
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The next bar continues lower, making a new low and closing lower. And though the next bar opens unchanged, it does make a new low, pressing through my profit orderat 128.70 before closing unchanged. As always, when I see my price print, I call my broker and make certain I am filled and that I am flat. Once he confirms this, I make certain he has cancelled my other orders, and I make him repeat my mantra: "You're flat and working nothing." Let's see how price finished out the day session:
http://www.medianline.com/images/550_6e04070515slide12.gifClick To Enlarge
You can see that price went a bit lower, but we caught nearly all of the profits available. This was a classic example of a failure of price at test of a prior high and once you see that failure unfold, the best way to trade it is to then identify a trade entry area with good risk reward to enter on a pull back, rather than just trying to get short once you see price making what you *think* is a failure by selling "at the market." By waiting for a set up with solid risk reward after you see these failures, you greatly improve the odds of this being a profitable trade AND you greatly dampen the emotions of the trade, IF price retraces and let's you get short at your potential entry area. You may miss a few moves by waiting for the retraces, but you'll find the results much more satisfying.
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!
Apr. 8, 2005Previous Archive Next Archive
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April 8, 2005 Comments: Here's a look at a market we haven't shown here before, but we'll be showing more trades in the E*Mini Russell futures, as well as in the Dax futures Contract, because they often trade nice and clean, with far less noise than the E*Mini S&Ps. Looking at the first chart, price closed on a regional high yesterday, above the red down sloping Upper Median Line Parallel, but still well within its recent congestion or Energy Coil. As I view this chart before the opening, I am wondering whether price will be able to break out of the Energy Coil to the up side and then make a run above the prior highs, because otherwise, I can invoke Hagopian's Rule. Why? Because price has failed to test the blue up sloping Median Line.
On the one hand, price is consolidating, re-storing its energy, and it's well above the blue up sloping Median Line Parallel. And of course, that's a positive for price. On the other hand, price failed to test the blue up sloping Median Line and now it is congesting in an Energy Coil, re-storing its energy. If price comes out of this Energy Coil to the down side, it may have a large move ahead of it. Which way will it break out? Let's let the market tell us:
http://www.medianline.com/images/550_ab04080515slide2.gifClick To Enlarge
Price gaps open lower, then quickly climbs out of the hole, still within the Energy Coil, but when it tries to test the up side of the Energy Coil , it turns back down and closes below the Energy Coil, in the process zooming through the red down sloping Median Line Parallel. *Note* that price still hasn't closed below the blue up sloping Lower Median Line Parallel, though it briefly peeked below it.
Now an admission: I was still on the side lines, twiddling my thumbs. It would be easy for me to tell you it was because price still hadn't closed below the blue Lower Median Line Parallel...and that would be a valid reason to not be ready to look for a short trade set up, because it's possible price will run out of down side energy at this test of the Lower Median Line Parallel . In fact, I was on the fence because I was looking right at the chart and didn't "see" the Zoom for what it was. It just zoomed into one eye and out the other, apparently...So, truthfully, I missed the first opportunity to look for a short trade set up. And the charts will reflect that today. Sometimes, you just miss 'em. So let's see what price does next:
http://www.medianline.com/images/550_ab04080515slide3.gifClick To Enlarge
The next bar is a perfect re-test of the red down sloping Upper Median Line Parallel that price just zoomed...which is what I am *supposed* to be selling. Errr...Anyway, note that for clarity's sake, I labeled a "Zoom Bar" and a "Re-Test" bar, so now everyone knows which bar is which . Also note I erased the Energy Coil lines, because the clutter in that area would be unreadable for all of you, so if you can't picture where the Energy Coil came in, just move back up an image or two. Now that I watched the high probability trade set up come and go...Do you think I can diagram another high probability short trade set up? Let's see...
Having missed the first re-test sale, I'll attempt to get short at a test of the same red down sloping Upper Median Line Parallel--BUT if price moves down fast from here and hasn't re-tested the zoomed Upper MLH in the next two or three bars, I'll cancel the trade set up, because I always like them to work quick and clean. So my limit sell order is to sell at 620, where I calculate price would intersect with the Upper Median Line Parallel that was zoomed. Where's my initial stop loss order? Three ticks above the mini swing high formed by the high of yesterday's last bar, which is also above the Energy Coil and above today's current high. That makes my initial stop loss order 622.20. And for a profit target, I think we might have a nice run lower here, because IF price breaks below and closes below the up sloping blue Lower Median Line Parallel, I can invoke Hagopian's Rule and that would tell me to look for an extended move lower--well past the first "most probable" line. So I am looking for a test of the red down sloping Median Line as my profit target, if there is enough time in the session. I'll use 613 as the initial profit target, so we can get an idea of the risk reward ratio. I figure that we are risking 2.2 points to make a potential 7 points, which makes the risk reward ratio just above 3 and very acceptable. Let's see it diagrammed:
http://www.medianline.com/images/550_ab04080515slide4.gifClick To Enlarge
Everything looks in order , so I call my broker and enter both my limit sell order at 620.00 and my initial stop loss order at 622.20. And again, I can enter both at the same time because price is trading below my entry level, so by definition, price will have to go through my limit sell order to hit my stop loss order. So whenever I can, I place my safety net on at the same time I place my entry order with my broker. Now the question is: Will price retrace high enough to fill me on my short entry order?
http://www.medianline.com/images/550_ab04080515slide5.gifClick To Enlarge
Price does climb a bit higher, making the same high as the previous bar, getting me short at my limit price of 620 before turning back lower and closing in the lower third of the bar.
As I see my price print, I call my broker and check to be certain that I am filled on my limit sell order, which makes me short, and that he is now working my initial stop loss order at 622.20. Now let's see how price unfolds from here:
http://www.medianline.com/images/550_ab04080515slide6.gifClick To Enlarge
The next bar opens unchanged and then climbs all the way back to re-test the zoomed red Upper Median Line Parallel but it runs out of energy at this re-test, right where it should, and turns lower. It makes a new low for the day and for this move and closes near its lows.
The next bar also makes a new low for the move and closes lower. Both of these bars have had nice ranges, so I eye the next bar with a little caution as the range is quite a bit narrower. And although it did make another new low, it closes higher and in the upper third of its narrower range. When the next bar also has a narrower range and then leaves a double top, I immediately take a closer look at the charts to see if it's possible to snug my stop loss order up. And after a quick peek, I call my broker and cancel my initial stop loss order and replace it with a break even stop loss order. Remember: Narrowing ranges, especially after a quick run in one direction, means price is re-storing energy. It doesn't mean a direction change *will* happen, but as I have said over and over again here, you *always* get paid back for playing, "What if..." In this case, if price is able to climb above the just-made double tops and also climb above the highs of the two bars prior to that, I'm not interested in losing any money on this trade. A move that high would also be a move back above the down sloping Upper Median Line Parallel--and I'd want to be out if price got there. But I don't want to snug the stop *so* close that I get stopped out by the noise of trading, even though this contract is not as noisy as the E*Mini S&Ps. Let's see where price heads now:
http://www.medianline.com/images/550_ab04080515slide7.gifClick To Enlarge
Price starts to climb higher during the next bar and then turns back lower. This bar is also an "outside" bar, meaning that its high is higher than the previous bar's high and its low is also lower than the previous bar's low. And if you think about what I just wrote, you'll see that this also implies it has a larger range. In chartist's slang, this bar is an outside bar that closes lower, which is something I always like to see when short. The next bar's range is wider still and makes a new low for the move, closing in the lower third of its range. But the next bar leaves me a little nervous, because it makes a new low, but then climbs all the way back to close unchanged. At one point during this bar, we were within two points of our initial profit target, so as this bar closes unchanged, I decide it's time to check our stop loss order and see if it's as close to the action as I can get it while still giving it some room for the noise.
Just looking at the chart, I snug up my stop to three ticks above the mini swing high made several bars back, right after the double tops. This comes in at 617.70, so my profit stop is now at 618.00, which means I am playing with the market's money--always a good thing.
http://www.medianline.com/images/550_ab04080515slide8.gifClick To Enlarge
Price climbs higher for the next two bars, with smaller range bars and then settles into an Energy Coil. There's then a series of small range bars with alternating highs and lows. Remember, if you run hard and fast, you have to stop and take some breath before moving on...Price is re-storing its expended energy here. Looking at the chart, you can see that my profit stop is as close as it can be without being right on top of the Energy Coil, so if price comes out of the Energy Coil running to the up side, I'll quickly be stopped out for a two point profit. Or it could head lower...By the way, note that I recalculated where price would intersect with the red down sloping Median Line and moved the profit target lower, from 613 to 612.30. And I'll keep a closer eye on it now, since we are getting within striking distance. As long as price is showing us it has more down side energy to expend, we'll give it every chance to make more progress to the down side until it hits the "most probable" line or the session runs out of time.
http://www.medianline.com/images/550_ab04080515slide9.gifClick To Enlarge
The next bar heads lower, breaking and closing below the Energy Coil. And the next bar follows through, making another new low and closing near its lows. The next bar is a very narrow range bar and as it closes, I check the charts quickly and snug my stop up once again, this time to three ticks above the top of the mini swing high that is formed by a pair of double tops and also is part of the top of the Energy Coil. The top of the Energy Coil is at 616.40, so my profit stop is now down to 616.70. And I recalculate my profit target again and move it lower, to 611.80. Let's see if price can keep this down side momentum going:
http://www.medianline.com/images/550_ab04080515slide10.gifClick To Enlarge
Price makes another narrow range bar and this one also heads higher, but then runs out of energy right at the test of the lower side of the Energy Coil, which is exactly what I'd expect to happen. There are multiple bottoms and tops forming the bottom of that Energy Coil and it should act as solid resistance now.
Price then heads lower for the next two bars, making a new low for the move. As the second lower bar closes, I snug my profit stop to three ticks above the floor of the overhead Energy Coil, which means I am now working a profit stop at 614.70. I then recalculate my profit target and move it lower again, this time to 611.20. And we're getting late in the day session, so I make my profit stop and Profit limit orders tied to a "MOC" or "Market On Close" order, which means that if my stop profit hasn't been hit and my profit order hasn't been hit, my broker will take me out of this position on the close. I never let a day trade turn into an overnight position!
http://www.medianline.com/images/550_ab04080515slide11.gifClick To Enlarge
For the rest of the session, price just drifts lower in an orderly fashion, each bar making a new low for the move. After a few bars make new lows, I move my profit order a little lower and as the last bar begins, I am working a profit order of 610.90. I eventually see my profit price print and call my broker. He confirms that I was filled on my limit order and he also confirms that he has cancelled both my profit stop and the MOC stop that he was working for me. Then I have him repeat my end-of-day mantra to me: "You're flat and working nothing." The repetition of doing this after each and every trading session reinforces my thought process to check and double check that all is in good order. You will never lose money by checking to be certain your broker agrees with what position you *think* you have and what he is or isn't working for you.
This was a nice zoom and re-trace example, with several embedded Energy Coils that resolved themselves in the same direction as my position. It netted a nice 9.1 points, which is $910 before brokerage per contract and that's not a bad day's work.
As I said in the beginning of this post, I'll be making more posts with examples in the E*Mini Russell and Dax futures. 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!