Using Simple Box Formations for Big Trading Profits (Part 5)

08/06/2010 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

(Continued from Part 4)

Now the trading gets fun! Sean was buying when everyone else (except the whales) were selling. When price opens higher and fails to make a new low, a multi-day rally begins, and on the fourth day after he get's long, price gaps open higher and closes near its high, nearly filling the first half of his profit target at 57.39. When he checks his positions and orders at 4:30 that afternoon, he decides to cancel his initial stop loss order and move it up to breakeven. He's now working a limit sell order on one half his position at 57.35 and he's leaving his original limit sell order at 58.45 on the balance of his position.

chart

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Watching him plan and execute his plan tells me a great deal about his ability to become a consistently profitable trader: Does he stick with his plan? Can he execute his plan and keep his emotions in check? This is currently a winning trade, and because he moved to breakeven, he won't lose money on the trade, but how will he react to a live losing trade, with real money? If he takes profits on this position and then prices explode much higher to the upside, how will he feel emotionally? As I said in an earlier article, “Welcome to ‘Mastering Yourself,’ son.”

chart

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Sean's limit sell profit order for half the position was filled the next day at 57.35, a few cents off the high of the day. Price began to sell off and managed to fill the open gap this past Friday (as I write this), but note that after opening on its low and filling the open gap, price closed on its high. It will be interesting to see how price reacts if it makes it back up to the magenta down-sloping line since it has now had “three drives to the top” along this simple trend line.

As I write this, move my chair back three feet, close my eyes and relax, then open them and take in the entire chart, I believe Sean's original take on this chart was correct: Price climbed out of a box formation, left an unfilled gap (which is still open nearly a year later!), and is now creating a new box formation. He read the whale tracks correctly: There certainly seems to be some significant limit buy entry orders at or near the top of the open gap. And I believe he had enough profit in the position that he had to move his initial stop loss order to a breakeven stop order.

Where will price go from here? Will the whales still have limit buy orders in the market if price sells off and approaches the top of the open gap again? Will the magenta trend line contain the rise of price if it climbs back to test it again? The beauty of the markets is that these are all good questions, and only price knows where it is headed. The rest of us can only create trading plans and execute them. Sean executed his plan extremely well: He has taken $3.75 per share on half his Costco position and he is long at $53.60 on the balance with a breakeven stop loss order. He's playing with the market's money, and that's always a good thing.

I hope you found this article interesting and informative. It's a new experience for me to be an investor, and of course, to watch my own young son plan and execute live trades in the markets. I catch myself biting my tongue at least once during each conversation, because I have promised myself I would not give him my advice—and looking at his results, he hasn't needed it so far!

I wish you all good trading!

By Tim Morge of MarketGeometry.com

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