So-so day for me. 4 wins and 1 loss, so I’m pretty happy, but I missed the one good chance I had to make a lot of money.

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On my setup, despite all the chop, there were two big opportunities today. And, I wasn’t at my desk for either of them. Damn! I did pick up some crumbs here and there, for 1.5pts. I had no losses today, so it was just 3 tiny wins and 1 b/e.

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They took a loss on a box play today in the eotpro.com live room this morning. I always feel terrible when that happens! Sorry! But it was some horrible sideways broadening chop action. I made a video about it to keep from falling asleep.

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I wrote an article about the Box Play. It’s long-winded, but whatever. Decided to go for .pdf rather than make a long post here.

Box Play Manual

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

The box play, squeeze play, and thoughts on turning your trading around.

Btw, I’m curious if Richard uses any of John Carter’s other setups.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I had a pretty good day in futures, except for my EMD plays (3 stops in EMD, ouch!). I made winning trades on YM and ES, but not enough to finish positive for the day. Oh well… I don’t think they were too interesting or educational, so I thought I’d have more fun presenting an ode to the box play.

Here it is:

For reference, here are all the posts tagged “box-play”. In particular, here’s the first one, with good explanation and here’s another good example.

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I was flipping through the June issue of TAoS&C at Borders tonight, and there’s an article about rectangle patterns. These are the daily chart equivalent of the box play. In it, a formula is given for selecting a price target. I’ve always just used the box height as the target, but this article suggests the formula:

t = 2.3 h0.8

… where t is the profit target, and h is the height of the box. This more or less suggests that you can safely choose larger targets for small boxes. Here’s a graph I made for the formula, against a straight line that represents the classic 1:1 ratio I have been using:

You can see that it starts out aggressive, but somewhere between 60 and 70, this profit target actually becomes more conservative than 1:1.

A couple things I don’t like about this idea:

• I was just skimming the article, and don’t have it in front of me, but I think it said that the formula did not care about units. So, you could plug in dollars, or inches on the printed chart, or whatever. You get out the same units you put in.

  But, because of the nature of this function, I fail to see how that works. For instance, if I plug in 100 cents, I get the conservative target of 91.5 cents. But, if I plug in 1 dollar, I get a target of 2.3 dollars. wha? Maybe I misread that section. Anyone with the issue care to comment?

• 2.3? 0.8 (which, when used as an exponent, represents the fifth root of the number raised to the fourth power)? Doesn’t feel very natural to me… it’s most likely the result of statistical regression. Not that numerically derived formulas are a bad thing, necessarily. But, before you believe stuff like this, make sure the sample size was very large, at least. Sadly, I didn’t read the article close enough to see how big their sample was.

So, the message I take away from this is: for small boxes, consider raising your target a little, and for large boxes, consider bringing your target in a little. That’s easier than doing the fancy calculations, and probably more reliable anyway if you are watching the action in real time.

As I pointed out on jaiku, a box play was forming on Goodrich Petroleum Corporation (NYSE: GDP) basically all day. It had a decent 20 cent target and healthy volume. If you can forgive one kind of loose touch, it actually had 6 touches to the boundaries before breaking out at the 7th touch. And, they are fairly evenly spaced, which is more important than you might think (with all patterns like these, you really want the price action to “fill” the space they are taking up).

At the time I alerted people to the play, I thought it would break out to the downside. I was kinda disappointed about that, because all kinds of moving averages live down there, and you never know when some dip-buyer will get excited. Luckily, I got a break to the upside right at the end of day:

As with most end-of-day box plays, the target wasn’t hit. But, I wasn’t stopped out, either, which is nice. AND, I got to use a stop tighter than the box-width, since it based a little at 33.25ish before breaking out. Not too shabby.

Since embarking on the box play, I have never lost money on it. I had one break-even trade in March, but that’s it! I heart the box play.

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GDP	| |

It was sloooow going today in the markets. At least, from my vantage point, anyway. The only thing I could find that seemed to have any force behind it was Seagate Technology (NYSE: STX). So, I traded it twice!

This is one of those rare days where I manage to trade both long and short on the same stock on the same day. Feels all “professional” :-)

The first trade was a scalp based on a deformed descending triangle formation. I played it as a scalp since it wasn’t too well-formed, and because it wasn’t near breaking its opening range low. Here’s the 15-min chart showing the shape I was watching:

Read the rest of this entry »

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STX	| |

Yawn. Man, what a lackluster trading day. As the goddess pointed out, there really wasn’t a lot going on this morning. Right now, it looks like QQQQ is going to end the day with something like 70% of its normal volume.

Anyway, the only thing I really saw worth watching was SLB, but it made a pretty sudden move all the way from 65.50 up to my intended buy point of 66. So, without any of my intraday setups to back me up, I will label this a breakout trade in stocktickr. I would normally time my entry to get in at 66.00, but since the alert surprised me, it took me a couple seconds to assess the situation and enter my order. I bought just a few shares, and got filled at 66.06. That didn’t make me happy, so I got out as soon as I saw any size on the ask. With a better fill, I’d definitely have stayed in this one until it stalled out.

Well, it was hard not to notice, a little later, that it had stalled out. On the chart, I’ve outlined a rough-looking box play that I could have put on, which would have had a (successful) target of 66.10. Since the breakout was against the overall trend, though, I decided not to take the trade. Geez, when will I learn to trust the box play? It never fails! (heh…). Anyway, I scalped it short, instead, and got less profit than the box play would have made.

As I mentioned via twitter, I’m pretty sure this is one of the only days I’ve ever been both long and short the same stock on the same day and won both times. Pretty nice, even though the total $ won isn’t anything to write home about.

Hopefully your day was swell, and tomorrow will have a few more fireworks.

I was away from my screens for most of the day. When I did get in (about 3pm EST) I was amazed by what a low volume day we were having. I looked around, and saw what I thought was a compelling trade idea on Steel Dynamics, Inc. (Nasdaq: STLD).

Here’s the chart:

My thinking went like this:

• a pretty clear-looking double top was formed earlier in the day
• price fell below the trough between the double tops (the “textbook” place to get short the pattern), but was stopped cold at 39.40ish.
• so, perhaps a lot of eager traders were trapped short, and would need to cover at EOD
• a box play had formed since the double top failed to follow through
• I thought, after an upward breakout, chances were good that round number 39.50 would serve as support, mid-channel.

So, I decided to play the box play on an upward breakout. You can see that I didn’t get to my target. There’s no way to know if my theory about the short sellers was correct, but there was a big surge of buying pressure at the end of the day (see the last volume bar). And, thank goodness for it, because it allowed me to get out for break-even in the final seconds of the session. I have yet to lose money, much less be stopped out, on a box play. I really like ‘em!

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STLD	| |

I was out most of the day, and when I finally got into “the office” I immediately spotted a box play setting up in Rambus Inc (Nasdaq: RMBS). I didn’t take the trade, because I thought the target was at important-looking support, and it was the last hour of trading. I was right in as much as the target did not get hit. But, it did get over 2/3rds of the way there… what, am I above making 0.67R now? I should have just believed in it… especially since I still have not seen a box play with a decent setup lose.

I’m not going to go through what the numbers mean every time, unless there is something special about my thought process for the setup. Check out other examples of the box play if you are unfamiliar with it.

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RMBS	| |

Here’s a box play on the 10-minute charts, with box width of 40 cents. These box plays are unstoppable!

The Setup

Chaparral Steel Company (Nasdaq: CHAP) was up on high volume, but got stuck in a range after making new highs on the daily chart. I was looking for a box play with a breakout on the upside. Instead, I got a box play with a breakout to the downside.

Entry Criteria and Trade

Here’s the chart of the trade:

1. I could have picked the previous green bar as the first part of the box play, but I don’t like to start at the top of a wide-range candle. That’s just me. So, I started on the local low about 50.35.
2. A local high is formed at 50.75.
3. The price didn’t quice make it down to 50.35 again, but since it was about 5 cents off on a 40 cent range, I let it go. Also, I was looking for an upside breakout, which would make a higher low good for me.
4. The 50.75 area is hit again. This completes the box. Once the price retraces 25% into the box, a trade will be taken on a breakout.
5. We have a nice orderly breakout to the downside. Initial stop is 50.75, and initial target is 49.95, for a 1:1 Ratio. I’d also exit after any serious push back up from extremely round number 50. In fact, it probably makes most sense to set the target at 50.

Target was hit a while later, in a tiny dip below 50 to 49.94. This was a very stress-free trade, as the price didn’t ever retrace back into the box area after the breakdown.

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CHAP	| |

I was away from my screens this morning, so I didn’t get a chance to play this one. But, this makes 8 for 8 non-losers. This one took its time to reach the target, but was only -0.6R at its worst point.

The Setup

Total SA (NYSE: TOT) gapped up on good volume. I noticed that the first 3 10-minute bars were alternating green/red at about the same height:

That’s a sign of a potential box play forming. The ADX on the 10-minute charts was rising, and the 5MA was catching up to the price. I reasoned that by the time a box play finished setting up, the 5MA would be even closer.

Entry Criteria and Trade

I took a look at the 1-minute charts, and saw this one touched at 5 points instead of 4, before breaking out in the up direction. Very nice! Here’s how the trade would have played out:

1. Local high forms the upper box boundary at 67.09
2. Local low forms the lower box boundary at 66.93
3. Local high touches 67.09 exactly
4. Local low reaches 66.92… lower box boundary is lowered to 66.92. At this point, the box is formed. Once the price retraces 25% back into the box, a trade will be taken on a breakout.
5. The price bounces off the upper boundary again
6. The price breaks out after a dip halfway into the box area. A long trade should be taken, with initial stop at 66.92. Assuming a fill at 67.10, a price target of 18 cents would be 67.28.

The price target was hit a bit later. The trade went at most a little over halfway back into the box before hitting the target, which would have felt pretty safe compared to yesterday’s box play (which took me to within 1 cent of being stopped out!).

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TOT	| |

I am loving the box play. I’ve spotted 7 so far, and this is the third box play trade I’ve taken. Some of the ones I’ve spotted never made it to their targets, but none of them would have been stopped out. So far, so good. I’ve been incredibly busy, so I haven’t yet gotten them into StockTickr, but when I do I will tag them “box_play”. I am in the process of specifying the entries for the ideas I trade more exactly, so I can similarly tag all of my trades by the type of play they were. This way, I can get better statistics on each type of trade I like to make. More on that stuff later. For now, let’s talk about the money I made today.

The Setup

Systemax Inc (NYSE: SYX) was up for the day on higher than average volume, running towards its 30-day high at 21.00. It had taken a breather and was starting to run up again in a standard kind-of rounded cup formation (10-minute chart):

As the markets were still range-bound, I did not want to make a bet that it would make new highs. But, I would like to play a run up to the HOD @ 20.74. I spotted a box-play on the 1-minute charts.

Entry Criteria and Trade

1. A low is formed at 20.57. I draw the lower box line.
2. A high is formed at 20.63. I draw an upper box line.
3. The 20.57 low is re-tested.
4. A high is formed at 20.64. I move the upper box line to 20.64. Now the box is defined. If it retraces 25% of the way back into the box, the trade will be taken on a breakout.
5. The price dropped almost halfway into the box, so the trade was taken @ 20.64 when it broke to the upside. Profit target is 7 cents above the box, and 20.71. That was perfect, from my perspective, as I could get out just under 20.74, where some selling pressure was likely to be.

… and though just after the trade I was within 1 cent of stopping out, it soon ran up into a more comfortable range. A little later, my profit target was hit. Every now and then, I get email about “why do you take a trade for only 7 cents?” These people don’t understand that it’s all about the expectancy of the system. You can get rich 1 R at a time, I promise!

Since it usually takes 20 to 30 minutes for a box play to set up on 1 or 5 minute charts, I like to think of these as cousins to dummy-style entries (tight 30-minute range during a pullback), only with demands on the internal structure of the 30-minute consolidation. If you think the stock can run higher than the box height, there’s no reason you have to take all your profits at that point. Right now, I’m just playing the trade as prescribed, to get a feel for it.

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SYX	| |