How Successful Traders Manage Their Trades (Part 3)

07/08/2009 12:01 am EST


Timothy Morge


Two bars after I enter my orders, price fills my limit sell order and I am short at 942.70. Price then leaves a double top bar that has a wider range and closes near its lows. So far, the trading plan is going as I expect. But I don't want to get too excited; I want to treat the trading plan like “paint by numbers,” because it really should be executed in a surgeon-like manner.

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Price plunges with a wide range lower bar that closes on its lows. This bar is good news and bad news: Price is quickly moving according to plan, but it is also expending a great deal of energy, because it is moving lower vertically.

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The vertical nature of the selloff also means price is leaving no lower swing highs for me to hide profit stops if price turns back higher. When the wide range bar lower forms and it closes on its lows, I am more than halfway towards my profit target.

This is where many traders get into trouble! They now feel the adrenaline of being short in a market falling vertically and they begin to wonder if they are underestimating the down side potential of this move. As I said earlier, your best view of any market is before you have these emotions flowing through your head, because you have already used a great deal of focus planning and executing the trade and now your emotions are tugging at you to alter the trade plan (the fear and greed tug!).

At this stage of my trading career (I have been a professional trader for more than 38 years now), I may be much more conservative than most traders, especially those that only daytrade commodities and futures. My first thought is preservation of capital, so when the large range bar closes on its low, I see it as an opportunity to move my initial $1 stop loss order down to a $1 stop profit, what I call a “profit floor.” Price has moved down vertically, and sometimes, it moves in one direction so fast it uses all its directional energy at once and forms a “V” bottom. If that happens now, I have boxed in $1 a contract; I am playing with the market's money and I just need to execute the trading plan sitting right in front of me.

I showed the participants in my live Market Maps session my new stop profit order and explained the thinking behind it and then I “tweeted” the new order and chart out to the trading world, via Twitter.

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Price wandered a bit, for more than two hours, and even though my position was always profitable, I was soon glad I had moved from a stop loss order to a profit stop order.

Note that when price did leave a swing high to hide my stop profit order above, the new stop order or profit floor happened to be where I had initially placed it. There should now be a solid group of limit entry sell orders resting at this new swing high, helping slow the rise if price headed back higher and acting as some protection for my profit floor.

As you can see, about 30 minutes after my live Market Maps session ended, price hit my limit buy order at 935.70, my profit target. I immediately tweeted out a chart showing that I had captured my range trading profits. The framing of this trade had been quite clear: Get in with a small initial stop order and if price sold off, grab profits from what I had identified as the “easy” part of the identifiable range. I planned my trade and I executed it in a surgical fashion. I took $700 profit per contract (before commissions) out of what I considered an easily identified range, with resistance above and strong support below.

More tomorrow in Part 4. Read Part 1 | Read Part 2 | Read Part 4 | Read Part 5

Timothy Morge

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