Taking Quick Profits Versus Boxing in Profits: "Bread and Butter" or "Bread Crumbs?" (Part 2)

11/11/2008 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

Now, it’s important to note that the “Bread and Butter” chart used by the trader in the original article was a 60-minute chart of the Euro FX/US Dollar cash FX pair. I generally trade on 240-minute charts, so some of the price action appearing on the first chart (a 60 minute chart) disappears on a 240-minute chart, because each 240-minute bar contains the price action of four 60-minute bars.

chart

Price gapped open higher on Sunday night, leaving what became a major swing high before trading lower. Price then formed an energy coil, an area of congestion where price restores its energy. The low of the energy coil was just above 1.4070 US dollars per euro, and the high of the energy coil was at roughly 1.4280. Price was unable to close above or below the energy coil for 14 bars, but it finally showed a change in behavior by breaking and closing above the energy coil. It then consolidated its gains, leaving a pair of bars that had lows that tested the highs of the energy coil. But after four closes above the energy coil, price shot higher and broke above the major swing high made early Sunday night.

There had originally been limit buy entry orders at the low of the energy coil, left by traders that were willing to get long at the multiple bottoms just above 1.4070. But once price broke above the major swing high, the majority of the limit buy entry orders moved higher, to the multiple tops of the energy coil near 1.4280 that had been resistance but was now most likely support. These limit buy entry orders were left by traders that had failed to get long when price was bottoming at 1.4100, and now were watching new highs being made above 1.4500 when they were not long—the train had left the station without them, as they say.

chart

When price broke above the major swing high at 1.4483, I added a blue up sloping Median Line. Note that, like the “Bread and Butter” traders, I used the low of the Sunday night gap as Pivot A when drawing my Median Line set. This particular type of Median Line is called a gap Median Line because one of the extremes of an open gap is used as a pivot.

At this point, I had a pretty good feeling for where the limit buy entry orders were sitting, and though price had taken out the major swing high, I was not ready to enter a trade—I did not see any sign of what I consider to be a high probability trade entry set up. Nor did I see any trade set up that had an initial stop loss that was within my own acceptable range. I was mildly bullish, but I saw nothing interesting enough to get me to enter the market at this point.

chart

Then an interesting thing happened—one of those market moves that occur when you least expect them. When price broke above the prior swing high at 1.4483, a good deal of traders went long on the break out to new highs. Though price made it up to 1.4542, note that the break out bar closed well below the prior swing high, and in the lower half of the break out bar. That meant that all those traders that went long on the move to new highs had losses in their positions at the close of the same 240-minute bar they had entered on.  And looking at the next five bars, you can see that the news did not get better for these traders. There were limit buy entry orders at the high of the prior energy coil, at about 1.4280, but by that point, the break out buyers were liquidating their long positions, and price ran right through these resting buy orders.

And the traders that had patiently left limit buy entry orders at the 1.4280 area quickly found that once their buy orders were filled, they too were holding losing positions, and so the sell off continued as the second set of stop loss orders began to be triggered.

The outcome of this break to a new high followed by a sell off through multiple areas of support left price testing the up-sloping lower Median Line parallel, and in fact, the test bar pushed through the lower Median Line bar. To this point, few traders likely got out of their long positions with a profit unless they were using “Bread and Butter” style orders to take profits on the way up, and moving their stop loss orders to break even.

As this last bar closed, here is what I saw:

chart

More in Part 3 tomorrow…

I wish you all good trading!

Best,

Timothy Morge

timmorge@gmail.com
www.medianline.com
www.marketgeometry.com

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