How to Catch a Trade in a Vertically-Trending Market (Part 4)

06/04/2009 12:02 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

Remember: Markets that are selling off in a vertical fashion that are unable to climb above the 38.2% retracement are extremely weak and are likely to continue to move lower in a near-vertical fashion once the shallow pullback is complete (the reverse is true in strong up-trending markets). If you can identify a high-probability entry at or near the 38.2% area after it has been successfully tested, it is generally a tremendous entry opportunity. Let's see how this one worked.

As you can see, once price failed to make it back to test the 38.2% retracement area, it returned to its vertical down move. If you managed to get on board at or near the 38.2% retracement area, as I did, it's now a matter of deciding how and where to take your profits. You can take your profits at prior lows, or you can attempt to let your profits run all the way down to a measured move, where A-B x 1.618 from C gives a target of about 1.0835.

chart
Click to Enlarge

Or you can keep boxing in profits, lower your stop profits every time price leaves a clear swing high, and simply let the trade run lower until your profit stop gets executed. I am currently using a profit stop above a prior swing high at 1.0951, so if my profit stop gets executed, I am short this position at 1.1230 and I'll get profit stopped out at 1.0951 for a net gain of 279 pips.

Any of these profit methods would have been more than acceptable. As long as you use a consistent method to take profits and keep a quality risk/reward ratio, you can make good profits trading in vertical markets. Stop loss orders are a must, as they are any time you take any trade, but they are especially important in vertical markets, because the moves in both directions can be explosive. It is extremely important to control your losses and keep them small relative to your profits.

I hope this article gives you some ideas that will allow you to find quality entries in vertically-trending markets, even after they have started their vertical moves.

I wish you all good trading. Read Part 1 | Read Part 2 | Read Part 3

Timothy Morge

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

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