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

I was at the doctor’s office this morning, and missed most of the move in crude. I tried a few paper trades that were unsuccessful. At least it was with play money. For now I’m trying to only trade my real account with either extremely low risk entries, or what I consider a high probability setup. Even though I didn’t catch this move in real time, it is what I consider to be money in the bank. I’ve catalogued a few trade setups that I think meet the criteria. Here’s an example from today’s action.

Around the middle of last week, crude started to rally. It spent all of Friday’s session, and a good part of this morning’s session pulling back into a nice bull flag. Note the MACD divergence as price continued to drift lower. It bounced off of S1, broke the downtrend while giving a double top buy signal (PnF). That rally was worth a $1.50 without any meaningfull pullback.

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

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

Check out this weekly view of crude oil. Not only did it drop five points last week, but it appears to have broken down from a bear flag. The chart speaks for itself. I would expect at least a test of the recent swing lows just under $53.

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

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

Crude was trading within a well defined range at support. I didn’t know which way it would break, but my bias was long today. After such a nice move down over the last several sessions, my thinking was that traders would want to cover and lock in gains going into the weekend. However, the first trade I took was a short trade. I was experimenting with the pimp moving averages (PMAs). Shortly after my entry, price started to fall. Volume came in heavy at support, and quickly formed a hammer. I don’t take a single candlestick in isolation, but when a hammer forms at support with heavy volume that’s not isolation. That’s 3X confirmation in my book. I patiently waited, and the same thing happened again. So far I have two minor losses, because I was trading out of boredom. I decided to wait for crude to test support again, and if volume came in I would enter on a bullish bar. Instead of waiting for that, I jumped in a long position on a possible swing low (with no potential for profit either). It didn’t take long for me to exit, because that trade was not based on any rationale at all. So finally volume came in at support, and I went long. I had my stop set. Remember, I had identified support on both the 5′ and 60′ charts. When I stopped out that time, I reversed my trade. Normally, I don’t reverse trades, because it leads to overtrading. However, this was one of the two setups that I had identified as part of my original plan. Play the direction of the break - especially if the week’s lows were taken out with momentum.

I would like to say that I stayed in that trade with the help of my trusty pimp moving averages (PMAs), but that’s not the case. I took three different short positions that were all profitable. My day ended up positive, but not for lack of trying.

I’m not going to get in the habit of posting every trade, or give a play by play of each session. The reason for this post is to illustrate what it is I’m stalking in the market. Today should have been easy money, similar to Tuesday.

Another reason is to point out how trading out of boredom not only affects your bottom line immediately, but it can possibly affect trades later on in the session. I was having a much harder time letting my winners run, because I was trying to get money back.

Part of my trading plan does require me to take small losses when the market is not acting right after I establish my position. An equally important part is to let my winners run. After today I can see that the 3rd ingredient is to take trades that fit the plan. Anyway, here is how the day should have turned out. As you can see, the 5′ and 60′ charts were both confirming a strong trade.

On a positive note, I did leave early since crude was trading near gap support. I didn’t force anything at the end.

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

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

There have been a couple of questions at Wallstreak about PMAs. Mainly, what are they? I first came across this idea in Mark Fisher’s, The Logical Trader. They are calculated using the average of the high, low, and close of each bar. Richard uses the average of the high and low which seems to produce very similar lines. The reason I use PMAs, especially on intra day charts, is to minimize the importance of the bar’s close. On a fast chart such as the 5′, the close is an arbitrary number. That same reasoning is what keeps me from putting too much importance on any individual candle.

As Fisher points out in his book, don’t focus on moving averages as barriers to be crossed, look at the slope of the pivot moving average line. A change in slope is an important indication of a change in perception in the market. He goes over specific strategies and periods that he uses which I won’t get into here. Instead I will focus on how I use them, and why I came up with this approach.

Like many traders, I have a few strategies. Some work great in rangebound markets — variations of divergence plays. Others work great when the market is trending. My only problem was that I had a hard time switching strategies. I would recognize a divergence between momentum and price, for example, and go short only to be stopped out. On days when I recognized the correct phase of the market, I would make money. On the other days, I would take multiple stops. To add insult to injury, after being stopped out of a divergence trade, I would have to watch the market run away without me. Psychologically, it wasn’t a good place.

Now I focus on finding intra day trends. I don’t trade counter-trend strategies at all. However, to make it work financially, I had to find a way to hold onto my winners. There are a few pieces to that puzzle, but PMAs have helped immensely.

I’m posting a chart of yesterday’s crude action, because it illustrates quite well how I use the PMAs. I made three trades yesterday. I scratched the first trade, because I didn’t like the price action, and wasn’t getting the follow through expected. The next two trades are highlighted. Both solid blue thick lines mark important points on the chart for each trade. They were wide range bars that sold off on heavy volume. That was not my signal for entry, but to watch closely for a place to get short.

After each bar, crude formed a bear flag. I went short on a breakdown from each channel. The 1st trade marked resulted in a 40 cent gain, and the 2nd was for 85 cents. I actually trade the QM, because of the lower multiplier, but trade off the CL which is what I’m posting here. The CL is the dog that wags the QM’s tail.

The PMAs were not used for entry on either trade. I made the lines thicker, so they are able to be seen. The white line is the 5, the purple is the 8, and the black line is the 13. As you can see on the chart that each of these lines converged just before bear flags broke to the downside. Once I initiated entry, I was anticipating a quick resumption of the trend. As prices started falling what I wanted to see was the PMAs spreading out. This indicates an acceleration of the trend. I covered the 1st trade when it was retesting the lows of the day. It formed a hammer on heavy volume, so that was a clue to exit. However, it formed another bear flag. After I was short the 2nd time, there was about 30 minutes left in the crude session. As you can see the bands spread out nicely, and even the 5 pma never came close to even turning back up. When I get a nice solid gain, and they PMAs are separating, I have more confidence to hold onto my trade. It helps me not to get shaken out of a great trade. I rely less on any individual candlestick at this point. I’m watching the bollinger bands, hourly support/resistance, standard moving averages on the daily, the clock, and my PMAs to determine if its time to exit. On a strong trend, I have found that using the center band (13 pma) is often a good place to trail my stop. Its just one minor tool that I use to determine the health, or strength of a trade that I’m in.

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