How to Find the Correct Place to Stand and Profit from the Lever that Moves the Market (Part 4)

07/18/2008 12:00 am EST


Timothy Morge


Once my limit buy order was filled at 115 14/32, price climbed higher and easily broke above the double tops of the mirror bars. And price closed near its highs. Everything looks good so far!

Now that the wide range bar has closed and I have checked my orders, I look again at where price closed. Remember, on these corner trades, I am trying to ‘rip out’ 6-8 full ticks and exit quickly.  Even though my profit target on this trade is all the way up at 116 03/32, I see that the close of this bar is at 115 19/32, which is five full ticks from my original entry price. I am so close to the price area I shoot for on the average corner trade, I can’t let this trade turn into a loser now. I cancel my initial stop loss order at 115 10/32 and move it to break even, at 115 14/32. Now the most I can lose on this trade is my brokerage fee. I’m willing to give the trade a bit more time to mature, because it is doing everything it is supposed to do when it ‘levers’ out of the corner, but I am unwilling to take a loss once I have a potential five full ticks in the position after a bar closes.

Price climbs higher and then consolidates before making a new high. The small poke lower in this three bar consolidation pattern is a mini swing low. Remember my general idea is to take 6-8 full ticks out of these corner trades, so I am willing to be very aggressive on my profit stops, if price gives me any structure to hide my order behind: If I am able to move my stop profit to 6 full ticks or better behind market structure, I’ll move my profit stop immediately. This trade is about getting my 6-8 ticks out and if I get more, that’s fine. But once the 6-8 ticks are available, if I can preserve them, I do so immediately.

I cancel my breakeven profit stop and enter a stop profit order three ticks below the 115 24/32 mini swing low at 115 21/32. If price trades back below this mini swing low and hits my profit stop, I’ll have taken seven full ticks out of the bond market in a very short time and that is exactly what this trade is designed to do; if it continues higher without hitting my new profit stop, that’s just extra profits—I’ll enjoy them, but my focus is on finding and locking in those 6-8 ticks on these corner trades. I am NOT willing to give the 6-8 ticks away in these corner trades once they are in my pocket to try to capture more profits.

The profit exercise here is to put myself in a position to harvest 6-8 ticks and then lock them in either by just taking them OR putting a stop profit order in the market that preserves them IF I can find market structure to hide my orders behind.

The next bar shoots higher, breaking well above the up sloping Median Line and filling my limit sell order at 116 03/32. I check that I am flat and that all my orders are now cancelled and do a quick profit calculation in my head. Then I check to see that my electronic platform shows a similar profit. If there is an error, I want to catch it now, not tomorrow morning when I open my statements!

Let’s see how the market unfolded once I was out of my position:

Price made one more attempt to trade higher and then entered a very quiet period for the rest of the day. This underscores the idea behind the trade: Early on in the day, bonds often form these ‘corners’ and if you can find a firm footing, you can use the leverage of the breakout from the consolidation to push your position to a quick profit. It’s generally a 6-8 tick profit and it has a lower risk reward ratio than I normally see in my other trading, but it has a very high probability of profitability. I only apply this technique to the bond markets, because I have better entry techniques in the other markets I trade—but I love taking these trades when I am day trading bonds. It was wonderful to have two of my mentoring students ask about these techniques from some of my older articles, because the bond market is alive and well again and they’re lots of opportunities!

I wish you all good trading!

Timothy Morge

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