The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
Seeing Through the Eyes of a Professional Trader (Part 5)
12/12/2008 12:01 am EST
Here’s a closer look at this formation. I call it a “rolling chop,” but break out traders may call it a “death trap.” I don’t want to sell at or near the bottom of this formation (and remember to take the slope into account!) because this formation does have a positive slope. I want to buy at or near the bottom of this formation—against the Sliding parallel. But I’ll only be willing to do that if I can enter a limit buy order at the Sliding Parallel and then put my initial stop loss order below the prior swing low, where limit buy orders should act as a buffer if price approaches the prior swing low.
Looking at the chart above, I have identified an area that meets my requirements:
- I want to go long at a re-test of the Sliding Parallel at 1.0209
- My initial stop loss order is five ticks below the prior swing low, at 1.0194. There should be a good amount of limit buy entry orders at the or near the prior swing low that if I leave my order five ticks below the prior low, I’ll be “protected” by the buy orders.
- In this case, I am willing to take my profit at a test of the Median Line, because so far, price has been unable to break above it in four attempts. If I manage to get long and then find a higher swing low to hide a stop profit order underneath, I can always try to “catch a ride” once I am playing with the market’s money. But for now, I would be very happy if I got long at the Sliding Parallel and then was able to sell it at the Median Line—which means I would have successfully traded the entire depth of this sloped trading range.
- I am risking 15 ticks to make a potential 100 ticks, which gives this potential trade a very nice 6.7 risk:reward ratio.
Let’s see what the market has in store for me!
Price came down several bars later and filled my limit buy order several bars later. Note that because the Sliding Parallel was sloped, I had to move my order a tick or two higher each time a bar closed. But I finally got long at 1.0212, and as you can see, price gave me quite a ride—just as bumpy a ride as the break out traders got, but my position was never at a loss. Price approached the Median Line where I had my profit order, but it didn’t quite make it high enough to fill my limit sell order. Price backed off about 65 ticks before leaving a “V” bottom, then traded higher, making the “V” bottom a swing low. Once price climbed high enough to confirm the new swing low, I cancelled my initial stop loss order at 1.0194 and replaced it with a stop profit order five ticks below the new swing low, at 1.0235. I am playing with the market’s money now, so my job becomes to concentrate on managing the position.
Price finally takes off to the up side, filling my limit sell order at 1.0321. Note that I moved my limit sell order several times, because I was long against an up sloping line—this means I was trading with the trend. It also means that as price moves further to the right, as I am in the trade longer, I must get paid more for keeping my capital exposed longer.
I hope you were able to see clearly through my eyes. It’s funny how a few sloped lines can change the way you look at a market formation. I hope you can see now why I favor this style of trading over methods like break out trading.
I wish you all good trading.
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