John Reese, editor of Validea, assesses stocks based on the known investing criteria of many of the ...
Don’t Forget to Pack All Your Tools!
08/17/2007 12:00 am EST
In the last article, I showed you a high probability entry method that you should be able to spot over and over again in any market, on any time frame, the ‘test and re-test’ entry. If you couple this high probability trade entry set up with solid money management, you should be on your way to profitable trading if you are an inexperienced trader. And if you are an experienced trader that relies on simple break out or un-filtered support and resistance entry methods, the addition of this entry technique should improve dramatically your profitable winning percentages.
I then showed you how I use rigid money management and risk reward ratios when preparing for a trade. I showed you in detail where I would be willing to enter a short position in this market and what initial stop loss and profit target orders I would use—and more important, why I chose those levels.
Finally, I showed you the execution of my limit sell entry order as price re-tested the red down sloping Upper Median Line Parallel. After I checked that I was filled on my entry order, I checked that my initial stop loss order was in the market and being worked. And then I entered my limit buy profit order and made it contingent with my initial stop loss order.
Here’s the status of this trade as Part III of the article begins:
1. I am short this cash EUR/US at 1.3748
2. My initial stop loss order is at 1.3775
3. My profit target is at 1.3638
Now that I am short, let’s see what this market does!
A good portion of the energy price re-stored while trading in that narrow Energy Coil is now being spent with a violent thrust lower as price moves away from the down sloping red Upper Median Line Parallel. After price spikes lower the first time, it leaves a spike higher and when price then makes a new low for this move away from the Upper Median Line Parallel, a new Swing High is formed at 1.3734. I cancel my initial stop loss order and place my stop profit order 5 pips above this new swing high at 1.3739.
I am now playing with the market's money, which is always a good thing. Now it's simply a matter of trade management: Boxing in profits until either my stop profit is hit or my profit target is hit.
After the two large spikes lower, price is low on energy, so it forms a classic area of congestion. Price is re-storing the energy it spent pushing lower, taking a breather until the next move unfolds. I expect price will continue lower and it does, forming quite a large spike lower that closes well below the red down sloping Schiff Median Line. I now move my stop profit order to 5 pips above the 1.3711 top of the congestion area, at 1.3716. I would move my stop order closer but there is no price formation to hide behind!
Now that price has firmly established itself below the red down sloping Schiff Median Line, it begins to make a series of 'same size bars’. And note that third and fourth bar following the large range 'zoom' bar have smaller ranges and are what I call 'mirror bars', which means they have the same range and have alternating closes: The first mirror bar closes higher than the bar before it and the second mirror bar closes lower than the first mirror bar. I have found these bars to be great markers for me: When I see mirror bars form, I always re-assess my outstanding risk on any open position. In this case, I decide to snug my profit stop to six pips above the 1.3675 double tops of the mirror bars, to 1.3681. Why six? I prefer 1.3681 to 1.3680--but its only personal preference. I have no statistical studies showing me that one pip will give me an edge--but it makes me feel better, so I'll spend the extra one pip.
You can see price is very close to hitting my profit target and in many cases, if I was short against down sloping lines, I would be moving my profit target down to match the slope of the Lower Median Line Parallel. But in this case, the profit area was not based on this down sloping Lower Median Line Parallel but instead was based on a simple 1:1 measurement of swing lengths. I am going to keep my profit target at 1.3638 and I'll be very happy if it is hit.
Price continues lower, making orderly lower lows and lower highs until it hits my profit order level at 1.3638. When I see my price print, I check to see that my electronic platform says I am filled, and then I make sure there are no outstanding orders. I double-check that I sold and bought an equal amount of contracts [or currency in this case] and that I am flat and working no orders. Finally, I do the math and make certain the P&L looks right—now is the time to uncover an error, not when I get my statements the next morning! Everything looks good, I'm working nothing and I can take a breath and enjoy a nice profitable trade in the EURO/USD that netted me 110 pips, or roughly $1500 per $100,000 traded [roughly the size of a CME futures contract].
Before I close the book on this trade, let me point one last trick [or tool] out to you: Look at the next chart and see where the traditional Median Line predicted price would run out of down side Energy!
Did I look at the traditional Median Line's projection when choosing a profit target and when choosing not to lower my profit target as price approached my 1.3638 limits buy order? Of course I did! Always use all the tools available to you when making decisions.
I wish you all good trading!
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