The Box Play: Companhia Vale do Rio Doce (NYSE: RIO)

Posted on January 23rd, 2007
Written by Richard
Posted in: N/A (old archives)

This is an example of one of the easier trading ideas from Mastering the Trade (McGraw-Hill Trader’s Edge). The author prefers to use this idea in currency markets, because he says they break out cleanly. But, as long as a stock is in a solid trend, I’m finding it works okay in the stock markets.

It’s really not too original an idea… plenty of books on chart patterns will show you a channel breakout pattern. I like the way Mastering the Trade describes it, though, because it emphasizes the importance of making sure the stock hits each trendline at least twice (and preferably three times).

Here’s an example of a box play on Companhia Vale do Rio Doce (NYSE: RIO) today.

Setup

Strong up move on strong volume in RIO, making new 52-week highs. Rising ADX on 60 and 30 minute timeframes.

Entry Criteria and Trade

I saw the box form on the 5-minute charts towards the end of the day.

RIO Box Play

  1. A local high is formed at 32.45. I draw the upper line.
  2. The stock reverses from a low at 32.14. I draw a lower line.
  3. The stock moves up and reverses from 32.43. Not quite touching the upper line, but good enough. Had it gotten a little higher, I would have moved the upper line up. Since it stayed lower, I leave the original 32.45 line in place.
  4. The stock dips down to 32.14 again, and reverses. When in retraces 25% back into the “box,” the trade is ready. I will short a drop below 32.14, and buy a rise above 32.45.
  5. The stock breaks out to the upside. I buy, and my initial stop loss goes at the lower line, at 32.14. My profit target is the same width as the box, or a 1:1 risk/reward ratio.

Profit target is hit a few bars later.

To read about this play and several others, check out the book. Trader Mike wrote a great review of it a while back, if I haven’t convinced you.

Comments

blog comments powered by Disqus