I Spy a Large Trading Opportunity–How You Can Too (Part 9)

06/26/2008 12:00 am EST

Focus: STOCKS

Timothy Morge

President, MarketGeometry.com

Price climbs again to test the green down sloping Upper Median Line but cannot climb above it and three bars later, price makes a new low for the move. That makes this last test a new Swing High, so I can snug my stop profit order three ticks above it, because I expect there will be traders trying to get short at or just in front of this new Swing High.

I am now working a stop profit order at 117 3/32. I’ll continue to ‘box in profits’ until either my limit buy order is filled at 115 16/32 or my current stop profit order is filled. Each time price leaves a new lower swing high, I’ll move my stop profit order lower. One way or another, I’ll end up with a profit on this trade now, so it’s a simple matter of paying attention to money management details and order management. Most traders find this the most boring part of trading, but the better you are at money management and order management, the more money you will book per trade—and I am known for surgeon-like money management and order management skills.

Price begins to move down and away from the Upper Median Line Parallel now as fresh sellers enter the market. Each new low draws in more sellers and although the market appears to be trading in an orderly fashion, you can see there are very few up side retracements to sell. Price finally consolidates around the green down sloping Median Line leaving two small spikes higher and then making a new low for the move again, which confirms these spikes as Swing Highs. Once again, I snug my profit order to three ticks above these new Swing Highs, at 116 19/32. I still expect there will be fresh sellers at or just below this new Swing High—it still looks and feels to me that there are fresh sellers in this market, traders that wanted to get short at 117 13/32 but didn’t get their chance, so they are looking for any opportunity to get on this one way train lower.

As I have mentioned several times, trading with an opinion can be extremely dangerous, because your focus, judgment and skills can be clouded. But note how careful I have been to box in profits at every opportunity in case price begins to back up. I cannot rely on my emotions to allow me to make a rational snap judgment when I have an opinion, so I ALWAYS protect myself with ‘hard’ stops, even if they are stop profit orders. If it is time to get out, I want my orders sitting in the market in advance, so no judgment comes into play—price will take me out at my stop profit order or at my limit buy order. All I have to do is analyze price as it unfolds and then adjust my money management orders accordingly.

Price continues to head straight lower because those waiting for a pull back just can’t find one to get short!  One by one, they get dragged into this market and that pushes price in my favor.

After another fifteen lower bars of similar range, price again consolidates around the Median Line, leaving a small spike high and then making a new low for the move. In reality, these are mini-swing highs. But I have so much profit in this position now and these mini-spikes are the largest pullbacks price is exhibiting, so I have to use them to box in profits.

Price leaves a new swing high again once it makes a new low for the move, so I snug my stop profit order from 116 19/32 down to 116 2/32. Remember my limit buy order is at 115 16/32, so I am getting close to the point where one or the other will be filled. But it won’t matter which is filled now—either order will leave me with a huge per contract profit.

Prices climbs a bit higher and tests the green down sloping Upper Median Line Parallel again but it contains price and the decline begins again—if you look close, you can see price came within one tick of my stop profit order but the traders waiting on the sidelines still trying to short this market had enough limit sell orders to halt the move to the upside before it reached my stop profit order. Always use the protection of market formations if they are available because you get the added protection of traders trying to enter in the direction of the prevailing trend—and remember, you get a 10-12 percent edge when trading with the prevailing trend!

Once the Upper Median Line Parallel acted as solid resistance, price turned lower and made a new low for the move about ten bars later. And a few bars later, price traded through my limit buy order at 115 16/32, filling my profit order. I quickly checked that I was flat and working no further orders and that I had bought and sold an equal number of contracts. Then I did a mental calculation of what I should of have made on the trade—roughly $1800 per contract before brokerage—and I made sure my electronic platform showed a similar amount per contract.

Remember, if there is an error, I want to find it now, while I am close to the current price, not in the morning when price could be anywhere! It’s too difficult to find and execute such a nice trade to give profits away on errors.

More in Part 10 tomorrow…

Tim Morge
tmorge@sbcglobal.net
www.medianline.com
www.marketgeometry.com

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