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Supercharge Your Stop Orders! (Part 1)
10/27/2008 8:54 am EST
Let's face it: most traders hate stops. They just know in the back of their mind that if they put a stop above (or below) their position, the market will find their stop-loss order, fill it, and then return to the trend, leaving them feeling they had the right idea but with no profit to show for it. This is such a prevalent belief, it must have some basis in fact. Or does it?
I have been a professional trader for more than 37 years. I am known for two things:
- I am probably the world's authority on Median Lines [or pitchforks]
- I am a master at using surgeon-like money management techniques when managing trades to "box in" and milk the most profit out of my trades. I want to show you some examples of how I use the market action and your orders sitting in the market to maximize my profits.
As we look at these images, I am not going to focus on the entry or profit target technique; instead, I want to show you how you can use market formations and other traders' orders to greatly improve your profitability. Let's look at a chart of crude oil futures:
Looking at the first chart, crude oil futures have come off their high of $147.30 a barrel. Once price began breaking through prior lows, I added in a down sloping red Median Line Set and its Parallel Lines. This left me with an up sloping and a down sloping set of lines-and an Energy Point, where two lines of opposing force meet, just below the high for the move. I know from my research that Energy Points act as price attractors and are also high-probability areas for changes in trends. Because oil prices seem to be showing some weakness and have come so far to the upside so fast, I put an order in the market to get short crude oil futures at the Energy Point with an initial stop loss order $2.50 a barrel above the prior high.
Since the majority of traders either use lagging indicators (MACD, oscillators, moving averages, CCI, etc.), at this point their indicators have yet to turn lower; the majority of the traders in this market are long or flat. And the few traders that use other methods are most likely working limit sell orders at or near the recent swing high, the all-time high for the move. I use Median Lines because very few traders use Median Lines as their main trading tool. Not only are they are a leading indicator, they also have a known statistical probability the moment they are drawn from three alternating pivots. The leading indicators I use, Median Lines, tell me there is a good probability that a major turn in oil futures has just occurred. I am short at the Energy Point, where an up sloping Median Line and a down sloping Median Line Parallel meet. But why put my stop loss order where I put it?
More tomorrow in Part 2.
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