How a Professional E-Mini Trader Finds Great Trades (Part 4)

08/26/2010 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

(Continued from Part 3)

Dr. Andrews, one of my early mentors and the person who gave us Median Lines and did years and years of research on action/reaction lines, taught that if price zoomed through a Median Line, it would come back and test the same Median Line. This is one of the high-probability trade entries we teach at Market Geometry, after we put in countless thousands of hours of research on various Median Line trade entry setups.

Now that price has gapped, or zoomed above the Median Line, you can buy the retest of that Median Line. In this case, there was no acceptable initial stop loss at this point, so I would personally pass on the trade. But price has left a poke with a double bottom formation that did recently test this up-sloping Median Line. If price retested the Median Line again within the next three to five bars, I would buy a retest of the Median Line (and in this case, a retest of the multi-pivot line and blue, up-sloping center line as well) with a stop roughly five e-mini S&P ticks below the prior test, which was the low of the day.

chart

Click to Enlarge

This is a set of Shane's market maps from the week, but I could not resist showing the gorgeous trade opportunity he had prepared for when he did his market map the night before. Again, he had personal business to take care of and did not trade this day, but this is how I would have traded his market map. (I could have written that Shane took this gorgeous trade, or that I took it, but again, our focus at Market Geometry is to teach people interested in trading how to trade and manage their trades as professional traders, and there are simply days when you have other things to do, or you miss a set up. There's no shame in that! That's life as it really is!)

I know showing potential trades we missed or losing trades, as well as teaching people how to set up market maps and become consistently profitable traders, takes a great deal of emotional pressure off of them. Professional traders miss trades. There will always be another trade. And even the best professional traders have losing trades 35 to 40% of the time. If you can keep your risk/reward ratio high enough, you can make a very good amount of money with a winning percentage approaching 50%.

I note the high risk/reward on the potential trade setup (6.5 to 1), and I also note that when price did turn lower on the day, it was right at the red, down-sloping center line from Shane's market map, a line he added to his charts on Sunday night.

chart

Click to Enlarge

The cascade continues lower to test the black, horizontal multi-pivot line that begins with the original open gap. What was resistance has clearly become support, and you can see though price tested this horizontal line, it then turned higher early Wednesday morning and climbed back to retest the red, down-sloping center line that had stopped the rise in price the prior day. Shane waited patiently for a trade setup he recognized, and he didn't see one until late in the day on Wednesday.

When price began to show weakness by breaking out of a tightly coiling or congesting formation to the downside, he added a new down-sloping Median Line. Although there was only a bit more than an hour to trade, he wanted to sell a test of the upper parallel if price climbed back to test that high, with an initial stop loss order above the high of the day. His profit target would be the down-sloping Median Line, which was more than ten e-mini S&P points below where he wanted to enter, so this potential trade would have a risk/reward of about three-to-one.

chart

Click to Enlarge

The selloff accelerated and never let Shane into the trade. You can see that even with just over an hour left to trade in the day, the imbalances pushed prices quite a bit lower. He had the right idea, but sometimes, price doesn't allow you to enter at a price with an acceptable stop loss, and chasing price in a running market is usually a losing proposition.

Again, we strive to teach traders to trade and manage their trades as professional traders manage their trades. Sometimes you have the right idea, but can't find an entry with the right risk/reward ratio, or the initial stop loss is too large for you, or price doesn't let you in. Don't waste your focus being frustrated or angry! Prepare for the next trade; there will always be another trade opportunity!

Continued tomorrow in part 5…

By Tim Morge of MarketGeometry.com

Related Articles on STRATEGIES