How I Look for “Home Run” Trades (Part 2)

05/05/2009 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

Today, lets look at another of my spring favorites: The crude oil market.

I was profit stopped out of my original long crude oil position just above $47 a barrel on a Friday afternoon. And wouldn't you know it, price gapped higher over the weekend and started to make a series of higher highs and higher lows—I had been "washed and rinsed!"

Well, that's part of being a trader. The most important thing you can do when that happens is clear your head and wait for another solid opportunity. I started watching an 89-cent range bar chart, which means that each bar is 89 cents from high to low. This takes the time out of the chart and helps deal with the uneven nature of the trading in the crude oil market.

chart

I added in a blue, up-sloping Median Line and its parallels and then waited to see if these lines were meaningful to price. After watching for a week or so, price did a good job establishing itself above the blue Median Line, and when I saw a nice gap close with good separation above the Median Line, I entered an order to get long crude at $49.30, with an initial $1 stop loss that was tucked below a prior swing low.

Price worked its way higher in an orderly, sustainable rally. This wasn't a fast run higher, but it was a steady increase in price, and that works just as well if you are patient. Price eventually left a swing low just above $50 a barrel and I moved my stop loss order up to a stop profit order at $49.91, which allowed me to use the likely limit buy entry orders as protection. This past Friday, crude finally hit my first profit target at $53.50 and I took half my position off at that level. Now we'll see if crude can climb to my second profit target above $55 a barrel, but since I am working a stop profit order on the rest of the position, this will be a nice winner no matter where crude trades from its Friday close.

If I'm long crude, you can bet I'm watching the Canadian dollar, and tomorrow, we'll take a look at that chart as well.

More tomorrow in Part 3.

Timothy Morge

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

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