I Spy a Large Trading Opportunity–How You Can Too (Part 5)

06/20/2008 12:00 am EST


Timothy Morge

President, MarketGeometry.com

I added a magenta down sloping Median Line and its Parallel Lines and anchored it off the last bar that just tested the down sloping Upper Sliding Parallel.

Note that price is making lower highs and is moving away from the solid 117 14/32 area of resistance. I want to get short as close as possible to that area, because I assume there are sell orders at or just before that area. These limit sell orders will act as a buffer to keep my initial stop loss order from being hit if I can afford to hide it above this area of significant resistance. I've diagrammed my orders for the potential trade I have in mind on the chart above:

  1. I want to be a seller of bond futures at a re-test of the Upper Sliding Parallel. On this chart it may appear I am selling in front of the line, but that is a function of the scale of the chart. Price will intersect with the Sliding Parallel at a price slightly less than 117 10/32, so I choose to enter my limit sell order at 117 9/32.
  1. My initial stop loss order is above the double tops that I used to draw the Upper Sliding Parallel and more important, above the rock solid resistance at 117 14/32. I am going to work an initial stop loss order at 117 15/32 and I expect there will be limit sell orders by many traders at or before the 117 14/32 multiple tops that will act as protection for my stop loss order at 117 15/32.
  1. My initial profit target is a test of the area where two Lower Median Line Parallel Lines come together (an area of confluence) and that area is at 116 11/32, though because I am trying to get short against down sloping lines, that profit target will move lower as price passes to the right because the lines are down sloping-meaning the longer it takes to hit my profit target, the more I will potentially make on this trade. As I have said many times, statistics show that trading with the slope of the lines, which is tantamount to trading with the prevailing trend, gives me a 10-12 percent edge.
  1. I am risking six ticks in the bond futures to make a potential 30 ticks, so that means my risk reward ratio is 30/6 or 5:1. That is a very good risk reward ratio-I never enter a trade with a risk reward ratio lower than 2:1.

I review my orders one last time, check the charts to make sure I haven't missed a nuance and then place my limit sell order at 117 9/32 and my initial stop loss order at 117 15/32 in the market at the same time. I want immediate protection should my limit sell order get filled-I don't want to be trying to type in my stop loss order while the market runs away from me-so I ALWAYS enter my stop loss orders at the same time I enter my entry orders. I cannot enter my profit order until and unless the market fills my limit entry order.

More in Part 6 on Monday.

Tim Morge

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