The Day I Watched Several Traders Implode (Part 2)

02/05/2008 12:00 am EST


Timothy Morge


The six traders I mentioned in Part 1 were very experienced traders. They each averaged about fifteen years of professional floor trading experience before they took my seminar and became students of my methodology. These particular six traders knew each other from the floor and had decided to ‘pool’ their money. They watched the markets together in their trading room and then entered group orders. And they were frequent visitors at the door of my prop room, where the rule is simple: if you have a question, you must bring your trading plan and a chart of the potential trade with you. Then you knock on the prop room door. If I don’t have a position on, I’ll spend time going over your potential trade entry with you, to make certain you’ve applied the course rules, used good money management in your stop loss, entry and profit orders and that your risk reward ratio is not skewed. Now let’s look at an image of a chart of the E Mini S&P futures market taken before the market opened:

Before the 7:30 am numbers, the market was trading a touch lower. Most of the floor traders decided when they did their morning analysis that this market was beginning a new up side stair step and they were hoping for an opportunity to buy a pullback. One thing they all cited was that price hadn’t even approached the 38.2 percent ‘Fib’ retracement at 1282, which they cited as the sign of a strong market. This market opened weak and ran through the 38.2 percent retracement without looking back. And though that was one of the main signs of strength traders had cited before the open, once this level was violated, they didn’t change their opinion—they simply ignored the violation of the retracement level.

Around 10:30, there was a knock on the door. The six gentlemen from down the hall were at the door and had their trade plan with them, along with a printed chart for me to look at. Here’s the chart they brought me [please note that all written comments on the charts are my own comments]:

They were looking to buy a re-test of the blue up sloping Lower Median Line Parallel that price had just tested. My response to them was that although price had broken below the up sloping line and then closed back above it, it had not closed above it with good separation. I urged them to ‘buy another bar’ and let the market show them it was bottoming before they committed any capital to a long position. I didn’t see a reason to think this market was turning up yet. It had fallen thirteen S&P points with no pullback. If anything, I was eyeing the green down sloping Median Line as an area that would potentially stop any rallies, but there were no formations to hide initial stops above. They listened to my opinion and then went back to their own trading room to enter their limit buy orders.

Let’s see what the next bar brought:

The six traders down the hall entered orders to buy the re-test of the blue up sloping Lower Median Line Parallel and put their initial stop loss order below the low of the test bar. They were quickly filled on their entry order and stopped out before their entry bar closed.

More in Part 3 tomorrow Part 1 | Part 3 | Part 4 | Part 5

By Tim Morge

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