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发表于 2008-4-19 10:11
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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 [In fact, I devoted a whole section in my first book to showing just how true that statement still is], 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 [or to use a technical term we traders use, this adds more slop...]. 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. |
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| 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 [Wednesday and Thursday], 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: |
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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 [or an Action-Reaction Line], 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: |
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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 [or low] 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 [or low], thousands of trend following traders would jump on the trend break out, going long with a move through new 20 day highs [and doing the reverse when price broke through the 20 day low]. And then, once in these new positions, taken at new highs [or lows] 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 [or above the recently made low], 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: |
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| 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: |
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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: |
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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[from below] 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 [forward in time]. 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: |
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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. |
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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 [or frequency] 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 [even though no one is "playing 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 [forward in time], 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[Market On Close] 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: |
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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! |
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