How to Catch a Trade in a Vertically-Trending Market (Part 1)

06/01/2009 10:13 am EST


Timothy Morge


One of the most exhilarating rides we can take as traders is when a profitable position we have on goes “vertical.” It's like being on a roller coaster: You can see the edge of the fall coming, you can feel the breeze in your hair start to pick up, and then suddenly, your stomach lurches and you feel the move accelerate! You're in a freefall, and the further you fall, the faster you fall, and the more profits you put in your pocket! There are very few parts of trading that give me any adrenaline rush after being a professional trader for 38 years, but catching a move just before it goes “vertical” is still one of them!

But there are problems with vertically trending markets: They often take off before you find and execute a high-probability trade entry, and sometimes you take profits right before they tip over the edge and go vertical. Many traders just cannot find high-probability entries once a market goes vertical. Let's see if we can look at some recent trades in a pair of markets that are now trending in a vertical fashion and find ways to enter in the middle of these vertical trends.

This first chart is crude oil futures, plotted using bars that are $1.90 in price from high to low. By choosing price range bars, I have taken time out of this chart. I use this charting technique when markets trade in fits and starts, because the dead periods can skew the charts, making drawing tools less accurate.

Click to Enlarge

My original long entry in crude oil futures was very near the bottom, at $35 a barrel. Once I was long, you can see that price began to climb higher fairly quickly. On a “normal” chart that uses time versus price, this move looks more vertical in some areas and then stalls and range trades in other areas, but using these price range bars, the move seems to unfold in a more orderly fashion.

Price climbed above $53 a barrel and then formed a series of three lower highs and three lower lows, which is a classic pullback in an up-trending market. I was able to draw a new blue, up-sloping Median Line and note how the outer warning line from the original red, up-sloping Median Line, which acted as support, forced me to use this third lower low as Pivot B when creating the new up-sloping Median Line. I find lines that are built on forced support or resistance pivots particularly useful.

After price made its third lower low, it gapped higher, and when price pulled back, I added to my long crude oil position on the first pullback with a tight stop just above $48 a barrel. Once price sprinted higher and approached the multiple tops, I took profits on one third of my position at $53.50 a barrel. When price spiked higher above the multiple tops, trading as high as $60 a barrel, I put a profit stop on my position at $53.50 a barrel.

Oil prices then entered into a trading range between $56 and $60 a barrel, but when they broke well above the top of this range, I put in an order to buy additional crude oil futures just below the top of the prior range, at $59.90 a barrel, with a stop on this new addition at $58.40 a barrel. If price was going to trade higher from this point, the top of the prior range would act as support, and if price broke well below the prior high, I wanted to quickly take my loss on these additional contracts.

As you can see, the top of the prior range did act as support, and though I was able to get long my additional contracts at $59.90, my stop loss was never in danger of being executed as crude prices closed the week at $66 a barrel!

More tomorrow in Part 2.   Part 2

I wish you all good trading,

Timothy Morge

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