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 5)
05/08/2009 12:01 am EST
Lets review one last market in which I was interested in fishing: The gold market:
This is an interesting chart because instead of using time-based bars, I told the charting software to generate bars every 89 cents. I find that gold often has volatile periods followed by periods of consolidation, and by using bars based on the range of price (89 cents from high to low, per bar), the gold chart seems to flow better.
Gold was in a nice downtrend and I wanted to fish for a short position. I added a simple red, down-sloping Median Line and then waited patiently for price to test the upper Median Line parallel. When price finally tested it, the bar that tested it briefly peeked above it but then closed on its lows, well below the red upper parallel. This is a sign of weakness, and I then began to look for a retest of this same upper parallel.
And I didn't have to wait long! As the next bar began to unfold, it rallied hard towards the upper parallel. I quickly measured where price would intersect with the upper parallel and entered a limit sell order at 900.70. My initial stop loss order would be 50 cents above the spike high price just made above the upper parallel. If price was strong enough to break above the prior bar's high (because it had closed on its lows), I wouldn't want to be short.
Price made it to the upper parallel, filling my limit sell order at 900.70, and once again, price closed on its lows, another sign of weakness. My initial profit on the first half of my position would be right before the test of the prior major swing low, at 885. Price made it to this level and I was able to take a quick 5.70 in profit on the first half of the position. And note that I marked an area on the chart "Multi Tops." I hid my stop profit order on the second half of my position just above the first of those multiple tops.
You can see that price sold off to 880.50 and then rallied back to form the second multi top. My stop profit order wasn't hit and I watched as price sold off hard again, stopping right at the 880.50 area again! Now I had solid support at 880.50 and solid resistance at 893. When price left mirror bars with tops at 885 (there are three bars of just about the same range and highs in a row at that area), I moved down my stop profit order to 886, just above the high of these three bars. If price plunged through the double bottoms at 880.50, it should run quite a bit lower, and if price was going to trade back and forth in a 13-point range, I'd rather take my profits off the table.
Before I could even calculate a profit target below the double bottoms at 880.50, price broke through the triple tops, taking me out of the second half of my short gold position for a nice 14.70 profit.
Now that I was out of my gold position, I watched the chart with interest. I soon noticed that price was making higher highs and higher lows, well above the double bottoms. When price broke above two swing highs, I marked the chart with "Change in Behavior" to remind myself that I may be seeing the start of a new uptrend in gold, and with that, I guess it's time for me to start fishing for a long position in gold!
Let me point out one more time that this has been an unusual positive run for me this spring. I do not expect that all my trades will be profitable, especially when taking longer-term portfolio trades. Even though none of my spring "fishing" trades have hit their ultimate profit targets, all have been profitable. This is an unusual string of winners, something called a 'positive run' in statistics. I don't expect it to continue, but I'll enjoy it while it lasts. Over a very long period (twenty plus years), my longer-term portfolio trades tend to be profitable about 55% of the time and they have very solid risk-reward ratios.
I hope you found these examples interesting and informative. Spring isn't over yet, so I'm still fishing, and I'll update you again later on this spring.
I wish you all good trading.
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