Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
Fishing for “Home Run” Trading Profits (Part 5)
04/10/2009 12:01 am EST
This is a 240-minute chart of the Japanese yen against the Canadian dollar. In many ways, this chart kept nudging me to fish for a long position in crude oil futures. You'll have to look closely (click chart to enlarge) because I wanted you to be able to see all the structure on the chart, so it is not a zoomed in look. This currency pair made three drives to the top, and it's easy to see that between the second and third drive to the top, price congested and then had a hard selloff. Price did manage to climb back high enough to make a marginal new high for the move, but once again, it came under selling pressure, and in fact, the bar immediately following the high that formed the third drive to the top was a wide range lower bar that broke below a prior swing low. At this point, I added in a red, down-sloping Median Line and its set of parallels.
Price congested at a lower level and then tried to make a new high but failed after testing the red, down-sloping upper Median Line parallel. When this bar closed, I entered an order to sell yen against Canadian dollars, just inside where price would intersect with the red, down-sloping upper Median Line parallel, at 1.4415, with an initial stop loss order 50 pips above the high for the move, at 1.4507. If I was filled on my limit order, my plan was to take half my position off at a test of the Median Line, while trailing stop profits if the market left me swing highs to hide my orders above. My ultimate profit target was a test of the multiple lows at 1.1520-which would be one heck of a catch!
I was filled on the next 240-minute bar and price quickly moved lower, making it below 1.3500 before leaving a major swing high for me to hide my stop profit order behind at 1.4030. It's easy to watch me ratchet down my stop profit orders as price made lower and lower swings. And in late February, price hit my limit buy order for one-half the position at 1.2635.
By now, crude had started to turn higher, so let's review the relationship between this currency pair. Canada produces three times as much energy as it consumes on a per capita basis. Japan is the fourth largest consumer of energy, and yet produces literally no energy. This currency pair is a wonderful proxy for the price of crude oil, though the timing of the turns does not always match exactly.
Once I was out of half of my position, the yen rallied hard against the Canadian dollar and I briefly attempted to sell out the half of the position I had taken profits on as the currency pair got closer and closer to the down-sloping red upper Median Line parallel-at the 1.3525 level. But the rally never approached the upper parallel, and once price began to break below swing lows, I cancelled the limit sell orders and went back to focusing on managing the portion of the position that I still had on.
With crude oil trading at or above the $50 a barrel area, the yen has again sold off against the Canadian dollar, and I have been able to lower my stop profit orders several times recently. My current stop profit order is at 1.3095 and my profit target on the remaining half of the position is at 1.1966, where price intersects with the down-sloping Median Line.
I hope you have enjoyed watching me fish for large, longer-term profits. Please do not be fooled into thinking that these trades always work! This is an unusual market and I have been extremely lucky this spring. I currently have seven positions on in the portfolio (I am fairly close to my maximum risk) and I have taken partial profits on three of these positions. And all seven are now being protected with stop profit orders, so barring a disastrous gap open against me in one or more of these markets, all seven will reap some profits. Because these trades carry such a high risk/reward ratio (I generally look for a minimum of five-to-one, and they often have a risk reward of 15 or more to one), I am quite happy if my win to loss ratio is better than about 50%.
But sometimes, the fishing is good and the White Sox play decent baseball!
I wish you all good trading and my heart goes out to all of you struggling in these difficult times.
Related Articles on STRATEGIES
Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...