John Reese, editor of Validea, assesses stocks based on the known investing criteria of many of the ...
How to Use "Crayon Drawings" to Make Money Trading (Part 5)
07/30/2010 12:01 am EST
After price had no problem filling the open gap, the question remained whether it would show the same strength at the rolling chop line looming overhead.Sean chose to deal with this question by trying to exit half his position before price tested the rolling chop line. He left limit sell orders for half his position at 17.78 and is now working a breakeven stop loss order.
Sean's done a very good job framing out this trade…so far. The area he identified where whales might have left large limit buy orders acted just as he expected: His limit buy order was filled and though traders probed the area, making minor new lows, price congested there briefly and then turned back higher.
He was able to collapse his risk using my concept of “Dynamic Risk Reward,” has now taken profits on half his position, and is working a breakeven order on the rest of his position. He has rolled forward some stops in his small trading account—I cannot stress how important that concept is—and he is now using the market's money to try to stretch his profits on the remaining position.
I have given him little, if any, input on his trading decisions; if he asked a specific question about market structure or market behavior, I was as helpful as possible. I haven't voiced my opinions to him about this trade or his other open trades, nor has he asked my opinion. In my view, traders do best when they educate themselves and then stand on their own two feet—and Sean apparently shares my beliefs.
Three bars after Sean takes profits on half his position, he sees his first live example of the bubbling enthusiasm that leads to a rolling chop, one of my favorite trading patterns. Once price breaks and closes above the simple down-sloping trend line, the last small traders were certain that a new uptrend had begun and they were not going to miss this move higher! Buy orders flooded the market on the open the next morning, but once everyone was long, there was only one place for price to go: Lower! Even though price closed on its high and above the magenta-colored rolling chop line two days in a row, when the buyers dried up, gravity took over and the following day, it gapped lower and closed near its lows, well back within the rolling chop channel. Many of the traders who went long were now finding themselves holding long positions that were either established at higher levels, or they were watching their profits evaporate.
After the market closed, Sean came into my trading room and told me he moved his stop profit order to five cents above his entry level. His reasoning? He had a nice profit in his first real position and he was trying to build his account. Even though he took half his profits at 17.78, he wanted to book some profits on the second half, even if it was just a few cents. I certainly couldn't argue with his logic; this was not only rolling forward stops, but it was also building confidence in his skills by making certain the entire position was a winner.
Let me show you the current chart, through the close on Friday.
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Sean's profit stop five cents above his entry level just missed getting filled. In fact, we were at the Grand Canyon that day with my 91-year-old mother, and when we got home quite late, he checked the price on my computer and was certain he had been stopped out. He wouldn't believe me until I showed him the time and sales from the day, and even then, he pulled the chart up on his own computer, certain my computer's prices were wrong!As you can see, price is working its way back higher, and Friday's close was above the magenta, down-sloping rolling chop line. Sean left his orders exactly as they were, and for the first time, he came to me and told me that even though he understood why the market isn't open on the weekends, it makes him anxious waiting for the market to re-open. (Welcome to “mastering yourself,” my son!) The most difficult part of trading is between the ears, but so far, I think he has done a very nice job managing this trade. I particularly like that he took some money out of the market and has rolled forward some stops, which will help when he has his first losing trade. This is one of the most important ways to build a small account.
I admit this trade is not my style, but then, I go out of my way to help my students of all ages to develop their own winning styles. I have no interest in creating a cloned army of Tim Morges out there; every trader is different and my goal is to help them become the best trader they can be—the best “them.”
I hope watching the ups and downs of Sean's first live trade—though it is not closed out yet—has been interesting and informative. Because I am building quite a large group of material for traders who are just beginning for our Web site, as well as getting ready to teach elementary and middle school students this fall, I'll keep you all informed on how Sean's trades are progressing, He's my in-house student experiment!
I wish you good trading!By Tim Morge of MarketGeometry.com
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