Knowing When to Take Money Off the Table (Part 3)

07/09/2008 12:00 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

Knowing When to Take Money Off the Table (Part 3)

Four bars later, price tests the up-sloping blue Lower Median Line again and it closes with good up side separation—which is again a sign of strength.

Price is now making higher lows, so I can now use the prior test of the Lower Median Line Parallel as a Swing Low—because there should now be traders placing limit buy orders at that prior low—and I can hide my initial stop loss sell order below this Swing Low. Let me show you what I mean:

Now that I have a Swing Low to hide my initial stop loss below, I can use one of my favorite entry techniques: the ‘Test and Re-test’ entry. Price has just tested the up-sloping Lower Median Line Parallel and if it comes back down to re-test it, I will be a limit buyer there, at 113 20/32. My initial stop loss will be three full ticks below the low of the first test of this up-sloping Parallel Line, at 113 16/32. I’m risking four full ticks in the bonds, but what is a reasonable profit target?

I have two Median Line sets on this chart and at least for the moment, it’s not clear to me which one will act as resistance to price. Do I place my initial profit target at the down-sloping red Upper Median Line Parallel or do I place it at the up-sloping blue Median Line? Both targets offer me better than 2:1 risk reward ratios, so either would be acceptable. There isn’t a huge difference in price while I am diagramming out this trade, but remember that as price moves to the right, the difference between the two potential profit targets will get larger and larger. Is there a way for me to get a better feel for which line is more likely to work?

More tomorrow in part four.

Timothy Morge
tmorge@sbcglobal.net e-mail me
www.medianline.com
www.marketgeometry.com

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