Another Classic

Here’s another “classic” wedge/channel break with confirmation. They happen all day, every day, if you know how to look. It’s not labelled on the chart, but the setup is just under the confirmation region of the trade I posted earlier today. That could well act as resistance, as bears protect the high of the spike down.

screwhammer

I don’t know if this trade will amount to much, as we’re an hour from FOMC and that can make things a little dry. Still, it’s not my job to prognosticate such things. It’s my job to be there when opportunities show up, and know that over time the gains will outweigh the losses.

Classic

I’m a fan of basic, classic technical analysis. Confirmed breakouts are always on my radar. I didn’t get all of this move (in fact, I’m writing this post to keep myself from chasing it down!). But, it was a nice setup, and exemplifies the kind of thing I look for. This was a way to catch a continuation of the opening move down.

simpChartPatt

Always Trade Trends (Even in a Range)

The market has two basic modes of movement… trending and ranging. Price moves further and more directly in a trend, and therefore getting in early on a new trend is the ideal trade. I think it is safe to say that I am always trying to trade a new trend. Does this mean I do not trade ranges and mature trends? Not at all.

The key to trading in a range is to recognize that:

  • at a larger scale, all ranges are part of trends
  • at a smaller scale, all ranges are made up of opposing trends

So, when the market is in a range, you have two ways to catch a trend: trade with the larger trend if it is still young, or trade smaller-scale trends inside the range.

The key to trading mature trends is to recognize that:

  • at a larger scale, the trend may still be young
  • at a smaller scale, a consolidating range gives way to a new trend

So, in a mature trend, you have two ways to join the action: trade with the larger trend if it is still young, or trade the transformations of smaller-scale ranges into new trends.

Note that in both cases, one option is to jump on the larger-scale trend if it is young enough. At the inception of a new large trend, just about any reason to get on-board is a good one. As trends mature, one must become more selective with trading opportunities.

It is also wise to keep the scale of the opportunities in mind. Great trades have a small-scale setup with a potential large-scale profit target. That’s relatively rare. Plenty of good trades have targets on the same scale as the entry. Knowing the difference will keep you from wasting good-trade profits hoping for great-trade rewards.

Trade with the Market Mood

Today so far the market is stuck in the range defined by the first bar… and it was a doji bar at the moving average! News hit at 9am Central, and still we are stuck. Now, most of us want to make big trades, and see big breakouts and fast profits. But what we want doesn’t matter. Do yourself a favor: hit the brakes on your trading until things heat up.

justwait

You have to trade the market you are in, and not the market you’d like to be in. Look at the open from yesterday on the chart above. Now that’s a rocking market! Trade early and often, and add to positions when you catch a good run. But today, it’s a different story. I’m looking for entries near the edge of the range, and I’m not trying to hold out for a big target. Otherwise, I’d lose or scratch every trade.

Typical Afternoon Trade

Here’s a typical trade for me in the afternoon, which to me is a basic Thales-type trade on a tiny scale.

The orange channel gives three pushes down to the congestion area from the open and yesterday’s close. That congestion area might provide support. Note I say “might” because I don’t know. You never know in trading. We get a couple clear swings putting in a higher low, with a very strong bar giving me an entry just prior to breakout.

A higher low breakout of a mature channel at possible support? Count me in!

2015_01_21_bread_butter

Will the trade work out? I don’t know. It’s not my job to figure that out ahead of time. It’s my job to be there, and give it every chance to work, while protecting my money if it doesn’t work. So far, so good. If it starts running up hard I’ll add to the trade. It looks like I’ll probably make something on this trade no matter what.

My Trading Style

It’s been a while since I’ve actively blogged, so I thought I’d catch you up on my trading style.  We are all an accumulation of our influences, and my recent trading draws on these three:

From Thales, I learned about waiting for good “swingy” price action, preferably at well-known S/R points. From Al, I refined my mental image of market structure, and now see all price in spikes, broad channels, and tight channels (sometimes all three at once in different time-horizons). From the Phantom, I learned to add size to winners and subtract size from losers. I used to be an all-in, all-out trader, but pressing my winners has really helped me.

Charts?

I keep four charts up. One is a five-minute chart, usually of 6E (EUR/USD futures) or CL (light sweet crude oil futures). I’m just keeping an eye on this in case something irresistible sets up. For currencies I watch the full globex session. For all others I watch the pit session.

The other three charts stick on ES (S&P500 e-mini futures), day session. I keep a 30-minute, 5-minute, and 2-minute chart up. It’s kind-of the old “Triple-Screen” method of Alexander Elder’s… 30-minute for context, 5-minute for setup, 2-minute for fine-tuning entry. Here’s what it looks like:

MyScreens

Sometimes I go through phases where I prefer volume charts. But, in general I have stuck to minute charts because they don’t need to be adjusted if you change which instrument you are watching. As it is, if a euro trade sets up, I can just flip my ES screens to 6E and everything looks fine right away.

I used to keep a second screen full of markets to survey, but I find most of the time ES can keep me plenty busy if I really “tune in” to what’s going on.

Indicators?

I use just a couple at a time… though the exact ones I choose depends on my mood.

Moving Averages In honor of Al Brooks, a moving average graces my charts almost all the time. Usually a plain-jane EMA, but sometimes I go for something more exotic. I find it doesn’t really matter much… you just use it to visually understand where price is relative to recent history. Sometimes I put on Guppy EMAs, instead, just because I think they look nice.

Anchored Averages, popularized by Paul Levine. I use them most often on the 30-min chart, but they look good on any chart in my experience. The version I use is home-grown and not the exact formula as the original (I usually disregard volume, for one thing). It’s the basic idea that counts, anyway. Here’s an example from today’s 30-min chart. You can see that since yesterday, support has meant a whole lot more than resistance. So, my bias is to the long side today:

ES 03-15 (30 Min)  2015-01-21

It’s nothing you can’t see with the naked eye, but the lines are pretty, and at times uncanny.

Trading Bands… think of tight Keltner channels and you’ll have an idea, but the ones I use are my own formula. Whenever my trading feels sloppy I put these on the fast chart and I force myself to only enter trades at good prices. Good means buying near the lower band and selling near the upper band. It’s good for the soul.

Random Others, too many to describe. Generally I’m just playing with stuff… like making a guppy-style multiple-ECO, or creating a moving-window frequency/size scatter plot, or other nonsense. Sometimes they wind up interesting enough to watch for a while, but generally I learn what they are trying to show me and then I don’t need to see them anymore.

Trades?

Generally I am looking for a big move, so I can size up and really make a killing. Easier said than done. I usually enter when I expect price to move soon. I don’t “establish a position” like some people do, and then they wait to see what happens. No, I enter with small size, and if it just languishes I take either a small profit or a small loss. I can always get back in if I want! If it goes my way but isn’t acting strong (gut feel), I take a profit. If it seems strong, I add contracts as the trade continues in my direction. I try to add on micro-pullbacks (a few ticks pop against me in the middle of a bar). Chances are like 50/50 whether this will result in a windfall or if price backs up too much I wind up scratching the trade. So, it’s kinda like a double-or-nothing proposition when I double-up.