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Seeing Through the Eyes of a Professional Trader (Part 1)
12/08/2008 11:07 am EST
I have been a professional trader now for more than 37 years. I think I have seen just about everything there is to see in the trading world. Sometimes, I watch the market and I literally ask myself, “Why are these people torturing themselves?” You would have to be able to see through my eyes to understand what I mean.
Maybe you can see through my eyes—well, maybe I can try to show you what I see through my eyes.
I learned about trading in my early teens by updating a scrap yard owner’s hand drawn commodity charts. He was a friend of the family and he hedged the large piles of metals, like copper, in his scrap yard on a regular basis—and he also liked to trade metals, especially copper futures.
One of the first chart formations I watched him trade successfully was something he called a “rolling chop.” It wasn’t a trading range and it wasn’t a trend—it was something in between. This formation has just enough down side or up side bias to it to get speculators interested in establishing new positions because they think a new trend is starting—but there isn’t enough follow through to keep them in their positions. I like to think of it as a trading range that has a slope to it. He named it “rolling chop” because these formations tend to roll on and on, chopping up more and more participants.
So let’s take a look at one of my favorite formations, the rolling chop. But we’re going to look at the market two ways. First, I’ll try to let you look through my eyes as I watch a group of typical breakout or momentum traders trying to trade their way through a rolling chop. Then, I’ll try to let you look at the same market using the market tools I use to frame the market (or give the market context some perspective). I hope you’ll be able to see what it’s like looking through my eyes—first watching other traders trade a market using their tools, and then watching through my eyes as I trade the same market. Let’s give it a try!
Price has a very nice run higher and then slows down and consolidates in a trading range. The market ran out of upside directional energy and it is restoring that spent energy, or resting. Once it has restored its energy, it will move out of this consolidation area, or Energy Coil.
I don’t yet have a clue which side price will choose to break out of. Do you?
After restoring its energy, price now trades above the prior high for the move. The typical break out trader leaves stop buy entry orders above the prior swing high, hoping to “catch a ride” when price does break out of the trading range. They believe that price will continue in the direction of the breakout because of its momentum. Price closed on its highs and the typical break out trader is now long.
Price didn’t go much higher—in fact, it didn’t go any higher than the high and close of that first bar that broke above the trading range—the bar that stopped break out traders into their long positions.
And then price traded sharply lower. Price ran straight through the trading range and made new lows, trading below the prior swing low. That triggered the break out traders stop loss orders, and they exited their long positions as price broke below the trading range.
Many break out traders actually exited their long positions and then went short when price made those new lows. They stopped and reversed to short positions because price broke below the prior swing lows. Once again, they were hoping to catch a ride when price breaks through a price extreme.
More in Part 2 tomorrow…
I wish you all good trading!
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