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Giving Yourself Time and Room to Be Right (Part 3)
04/29/2009 12:01 am EST
Now let me analyze a quality “Lazy Z” pattern:
- Price makes a new low for the move, breaking below a trend line or Median Line. In this move lower, breakout traders enter new short positions when price breaks below the prior low.
- A short covering rally ensues, as the new weak short positions get washed out of the market. This rally ends as soon as all the stop loss buy orders are filled.
- The short covering rally leaves a pseudo swing high that is above the trend line or Median Line, but near enough to the current action to be useful when attempting to hide stop loss orders.
- Fresh sell orders enter the market and push it to new lows again. This second wave of selling confirms that there are new sellers available to push prices lower. In effect, the second low confirms that the trend is likely to continue. When a new low for the move is made, it confirms the pseudo swing high as a true swing high, and there will now be limit sell entry orders at or near that new swing high that you can use to protect any short positions you initiate.
- Now you can enter a sell order at the re-test of the trend line or Median Line in case price approaches it from below. If filled, your stop loss order will be above the recently formed swing high.
Now that I have drawn it all out and described it, let’s see how the market behaves:
Price makes a wide range bar lower. Note that it leaves a higher high and a lower low! This bar marks a new low for the move and the high of this bar is now a pseudo swing high.
I place orders to sell a re-test of the red, down-sloping Median Line. I price rallies to the Median Line from below. I want to enter a short position and my stop loss order will be above the new pseudo swing high.
Price makes a new low for the move, confirming the pseudo swing high as a true swing high and then rallies to test the Median Line. I get short at test of the Median Line and my stop loss order is above the new swing high, where there should be limit entry sell orders left by traders looking to enter new short positions. These orders should act as protection and help keep me from being “washed and rinsed.”
More tomorrow in Part 4.
"Master your tools, Master Yourself."®
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