The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
How I Look for “Home Run” Trades (Part 4)
05/07/2009 12:01 am EST
Those of you who read my articles on a regular basis know that I love to hide my stops below prior swings because the limit entry orders sitting at those swings offer my stops protection. But as I began working the limit buy orders for this second long position, I knew there wouldn't be a quality swing low beneath which I could hide my stop. I was very confident that this lower parallel would generate a quality long entry if price tested it, and in fact, I was so comfortable with this lower parallel that I was willing to get long on a simple test of the line, instead of waiting for a test and retest, which is my favorite entry set up.
I thought about it this way: I had rolled forward 286 pips of profit from the earlier trade into my account and I was willing to risk a portion of those on a second attempt to fish in this area. My long entry came at 1.2965 and I used an initial stop loss order at 1.2897, so I was risking 68 of the pips I had made off of this line on the first trade. My first upside target was a combination of two things:
1) I measured the distance price traveled in its last leg up from pivot C to pivot D and then projected that same distance from my entry (which I've marked as pivot E) and this gave me a price target just above 1.3349.
2) Once I marked where the C-D = E-F target was (just above 1.3349), I immediately noticed that price would also be running into the pink, down-sloping upper modified Schiff Median Line parallel.
This gave me confidence because the confluence of both methods told me price may pause as it approached this level, so I immediately entered a limit sell order at 1.3349 to take profits on half the position if price climbed to that high. And price climbed in a near vertical fashion to test that area, taking me out of half my position for a very nice profit of 384 pips. You can see that price struggled to stay above this area of confluence, and after consolidating it sold off by roughly 150 pips before turning back higher. The low it left behind became a new swing low and I was soon able to hide my stop profit on the balance of the position underneath this area, at 1.3177.
Where should I take profits on the second half of my position? I used a simple Fibonacci expansion ratio of 1.618 applied to the same swing higher that I used for the first profit target. I measured the distance price traveled in its leg up from pivot C to pivot D and then projected that same distance multiplied by 1.618 from my entry (which I marked as pivot E]) and that gave me a price target just above 1.3610. I then immediately noticed that near this area, price would be intersecting with the blue, up-sloping upper Median Line parallel. Putting these two areas together, I feel that it would be wise to take profits on the second half of my position just below these two areas, so I enter a limit sell order to take profits at 1.3567.
You can see that I have already taken 286 pips profit out of the market on the first trade, and now I have taken 384 pips out of the market on the first half of the second trade. I have a stop profit in the market on the balance, which would net me 212 pips on the second half of my position if my stop profit order is hit. And if my profit target is hit, I will take 602 pips in profit on the second half. Not bad for fishing!
We will conclude by looking at one last market in which I was interested in fishing: The gold market.
More tomorrow in Part 5.
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