The Foundations of Profitability for Traders (Part 5)

03/14/2008 12:00 am EST


Bo Yoder

Publisher and Writer,

In the past few Tips for Traders, I have been describing an alternative way to look for edge in the markets. By analyzing where large order clusters are likely to be lurking, the active trader can capture the rapid price moves that often occur as markets test these areas of trader interest. Let us look at some recent examples from the markets last month.

In this first chart, we see our SPY trade plan in its entirety. The market is trendless, and as such offers the potential for a long biased "magnet trade". The trade is triggered by a breakout to the upside, and protective stop loss orders are set on the opposite side of the range. Our profit objective is set at 200sma resistance, as the goal of this trade is to squeeze profits out of a testing move rather then a true trend.  The stock breakout out, triggers entry, and reaches its profit objective within a few bars.

This next trade example comes to us from the stock of Dominion Resources (Nyse:D). This stock was showing signs of listless drift as it chopped and hacked just beneath its 200sma (blue line). The long trade triggered as the highs of this micro range were broken, and protective stop loss orders were set just below its lows. A price spike formed as the stock passed though the area of low liquidity (air pocket) just underneath the 200sma. The trade delivered as it reached the 200sma, and profits were taken.

This magnet trading concept can be utilized on the short side of the market as well.  In the following chart, we can see a successful magnet trade pattern that formed in the ETF that tracks the Nasdaq 100. (Amex:QQQQ) Once again, we see a trendless period of chop that formed right near the 200sma. The short signal was triggered as price broke down in the direction of the 200sma.  Protective stop loss orders would have been placed above the upper extreme of the base, and the trade paid out as tested the 200sma and achieved its profit objective.

This magnet trading concept can be applied in any time frame, and has performed for me in the equities, futures, and foreign exchange markets. Although it can be a bit hard to find at times, I see these patterns as "found money" when they occur.  Their win rate is high, their holding time tends to be short, and they offer a powerful edge to traders searching for these patterns. I hope they bring an increase of profitability to your trading programs!

Good Luck and Good Trading.

Part 1  |  Part 2  |  Part 3  |  Part 4

By Bo Yoder, of

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