How I Look for “Home Run” Trades (Part 3)

05/06/2009 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

Let's take a look at another market I'm watching: The Canadian dollar.

The Canadian dollar has been strengthening against the US dollar, and of course, I believe it's because they are producing three times as much oil per capita as they consume-so the cash just flows across the border when the demand from crude picks up. And as my wife always reminds me, "They'll find a way to get prices up for Memorial Day—they always do!" 

Remember this is a cash forex chart, so as the Canadian dollar strengthens, it's price heads lower because it takes fewer Canadian dollars to purchase one US dollar. And you can see that Canada's dollar has been strengthening for some time. I wanted to find a quality test and re-test entry with an acceptable stop hiding above a prior swing high—and I finally found one!

chart

I got short this currency pair on a re-test of a down-sloping modified Schiff epper Median Line parallel at 1.2430 with an initial stop loss order at 1.2530-which was the initial test of this upper Median Line parallel and a swing high. I then simply measured how far price had traveled during its prior swing lower and then transferred that same distance to the current swing lower. This is a simple A-B = C-D measurement.

That gave me a profit target on the first half of my position of 1.1847, which was hit this past Friday (which was apparently partial profits day for me!) My second profit target is simply that same distance, but instead of assuming it will travel 100% of the distance from A to B, beginning at C, I measured where price would be if it traveled 161.8% of the distance it travelled from A to B starting at C. This gave me a profit target of 1.1327 on the second half of the position. I am currently working a stop profit order of 1.2284 on the balance of the position, which is above a prior swing high.

Now let me show you how fishing is going in the euro against the US dollar market:

chart

The euro FX was in a nice uptrend and then began a pullback. I was long for the first explosive leg up and then took profits on 1/2 my position and exited the second half of that position on a stop profit order. Look closely at the area marked as pivot 'C' on the above chart. There is a gorgeous test and retest following a spike low that failed to make any new downside progress. This spike lowers and then closes back above the blue lower Median Line parallel and is a significant sign of strength. I bought the euro on the retest at 1.2907 and put my initial stop loss order at 1.2877. My profit target on this first trade was a simple price target generated by taking the distance price traveled on its upswing from pivot A to pivot B and then projecting that same distance from the pivot marked C. This gave me a profit target of 1.3193, and you can see that once I was in the trade, price climbed in a vertical fashion, hitting my profit target easily.

Once out of this first trade, I began watching for another opportunity to "fish" in this currency pair on the long side, since these lines were working so well. The key for longer-term trade fishing success is to be patient and wait for a high-quality entry. It may take days or weeks for price to come to an area you feel has a quality stop and then develop a high probability trend entry set up, but the secret to good fishing is waiting for the good "fishing holes" to show themselves! You won't catch fish in the bathtub! You need to find a quality fishing hole, and sometimes, that takes patience.

I waited patiently while price headed higher for a bit and then waited while it began to trade lower. Did the selloff worry me? Not a bit, because price would need to sell off to get to an area that I felt was a high-quality fishing hole! I wanted to see price come back down to the same lower Median Line parallel that worked so well on the first trade.

On my second entry, I waited for price to approach this lower parallel, and when it got close, I began working limit buy orders at the area where price would intersect with the lower parallel. This line had already proved its worth to me, and I had 286 pips of profit in my account from this line to roll forward into this potential trade.

More tomorrow in Part 4.

Timothy Morge

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

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