How a Professional E-Mini Trader Finds Great Trades (Part 3)

08/25/2010 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

(Continued from Part 2)

I have been researching and teaching the concept of lines of opposing forces, or energy points, for quite some time. I am proud to say it's one addition I have made to technical analysis. These energy points act as price attractors and often serve as areas where price makes a change in behavior. I don't use them to anticipate turns in price; instead, I mark them and watch those areas carefully for price to exhibit changes in behavior.

In this case, you can see that Shane's red, down-sloping second reaction line (R2) and his blue, up-sloping reaction line (which are lines of opposing force, or lines with opposite slopes) cross at the area that coincides where price does indeed gap open—and price shows a change in behavior by forming an extremely wide range bar that closes near its highs. In many ways, you can think of these lines of opposing force projecting a sense of a time where price may exhibit a change in behavior. And in this case, price and time came together, and a change in behavior seems to be happening.

chart

Click to Enlarge

Although Shane's market map going into Monday's trading was “picture perfect,” he did not see a high-probability trade entry setup that he uses on a regular basis to allow him to enter a trade. The majority of traders feel they must have an open position if they are watching the market; but successful professional traders learn that they survive and prosper by taking trades that have a successful outcome for them on a consistent basis. There are often days that go by when they “know” where the market is likely going, but they have no edge, no acceptable money management stop, or they don't see a high-probability trade entry setup they use, and so they don't take a trade. We have seen that when we show live action and “bar-by-bar” replay during our Market Geometry live mid-day sessions, mid-sized and retail traders find it at first surprising that we watch without positions even when our market maps are so accurate that particular day, and then they find it comforting because it takes some of the pressure off of them to always have a position anytime they are in front of the screen watching the markets.

At the end of Monday, Shane made a single addition to his market map from Sunday night: He added a green, up-sloping Median Line (or pitchfork) to project the probable path of price if Monday's gap-open low was indeed a significant low and price continued higher on Tuesday.

chart

Click to Enlarge

On Tuesday, Shane took a personal day away from trading and wasn't present at the live Market Geometry mid-day session, but we all peeked at his market map from the night before to see if it had any relevance to price. You can see that price gapped open higher, above the blue, up-sloping center line, above the red, down-sloping reaction line, above the green, up-sloping Median Line, and above the black, horizontal multi-pivot line. If you push your chair back and look at the chart, you'll see that price gapped open above an area where these all meet or clump together—and you should consider this a form of energy point. This area is a price attractor, but you have to watch price for it to tell you how it is going to react at this energy point.

Continued tomorrow in part 4…

By Tim Morge of MarketGeometry.com

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