Altius Minerals (Toronto: ALS) is one of our favorite junior resource companies; the miner is pursui...
How to Find the Correct Place to Stand and Profit from the Lever that Moves the Market (Part 1)
07/15/2008 12:00 am EST
While teaching my one-on-one mentoring sessions, one of my students mentioned that he had been looking at the US 30 year bond futures and wasn't seeing any entries. He had heard me mention that there are times when I have been an extremely active day trader in the bond futures and he wanted to know what time frame and charting technique I was using. I explained to him that in the early 1990's, I was a very large intra-day trader in both the copper and natural gas but they opened later in the morning. Looking for something to trade in the first few hours of my trading day, I began to watch the bond futures and set a task for myself: Find a high probability entry technique that gave me on average 4-6 entries a week during those first few hours [7:20 am CST until 9:30 am CST] that led to trades that generally ran their course quickly; in short, I wanted to find a nice scalping technique that would let me take on average 6-8 ticks out of the bonds with a high probability of success.
After several months of research, I found a repeatable pattern and then spent a few more months fine tuning the entry and the associated money management techniques to go with it. I only use this technique, which I began calling a 'corner trade', when day trading the bonds. And when the bond market gets inactive, I don't bother trading it. And note that although my long term historical risk reward ratio on all of my actual trades runs right at about 3.5 to 1, corner trades in the bonds often carry a risk reward ratio of well under 2 to 1. But the probability of them being profitable is well above 80 percent if you correctly identify the 'corners'.
For many years, I made more than enough to live on trading this entry alone, though my large trading profits come from my more traditional trading entry techniques: Test and re-test, sliding parallel entries, and simple Median Line Test trades.
Since beginning to show this technique to this first mentoring student, I am now teaching it to a second student in mentoring, and both are picking it up quite fast. This is particularly pleasing. It tells me that not only can I make money trading the technique, but that it is also teachable-in other words, it's not my ability to scalp the bond market that is behind the profits but it is an actual repeatable entry that can be taught to and traded by others.
Let's take a look at a 352 tick US 30 year bond futures chart from the CBOT:
This is a 352 tick chart of the US bond futures traded on the CBOT. That means that each bar has 352 ticks [each tick is an up or down movement] and when the 353rd tick happens, it starts a new bar. This takes 'time' out of this chart and that's important because the bond markets are prone to periods of inactivity and that would skew any lines I draw, even though nothing is going on-it's simply the charting package printing a bar every XX minutes. By only forming the bars from actual trades [or ticks], I can take the skew out of the charts and the lines I use to trade are much more reliable in this market.
You can easily see that bond prices made a nice climb higher, breaking above the prior major Swing High before pulling back. Now price is consolidating, leaving near double bottom lows-and it is consolidating well above the prior major Swing Low. Note that I added a blue up sloping Median Line set to show me the probable path of price if these lows hold and price begins to climb higher.
Let's zoom in on this area of consolidation so I can point out some important features of this formation:
This is your first look at a formation that could spawn a 'corner trade' in the bond futures. Note that the two bars that follow the low bar marked 'Pivot C' are labeled 'Mirror Bars', which is a formation I have done a great deal of statistical research on over the years. Mirror bars are a 'marker' or 'flag' for me, telling me price is about to make a major move. And they always have the same two qualities: They have the same range and they have alternating closes, meaning one bar closes higher and one bar closes lower [It does not matter in what order the alternating closes come, just that they are alternating closes].
More in part 2 tomorrow.
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