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MSFTLAST-3 min 1G/02/20DG 059 063 *3 5 0 ~6. 0% ;
Figure 8.2 A double bottom formation identified by two successive Category 3 support points is used for the placement of a sell stop for entry into 3 short position in Microsoft.
Chart created with TradeStation® 2000f by Omega Research, Inc.
Figure 8.3 demonstrates another useful technique for the use of resistance, in this instance during an uptrending day. Assume that one and a half hours into the trading session we have determined with the help of the Directional Day Filter, that the major trend of the day is higher. Also, there has been a buy window opened up using several of the oscillator-type indicators, With these facts in place we are now actively searching for a high-accuracy entry into the uptrend.
Shortly after 10:00 a.m. the resistance point labeled #1 becomes our prime focus for the placement of our buy stop. According to system rules we will place a buy stop at this level. Recall that this point is not available until the 10:00 a.m. bar is completed.
A little over an hour later point #2 comes into play. We now have a resistance point that will allow us to enter at a lower level with the same probability of success as was present with the entry at #1. At this time we will cancel the buy stop placed at point #1 and replace it with the lower buy stop at #2. Our first long position of the day is established as the market trades through our buy stop two bars after the stop was moved to the lower level. Again recall that this stop cannot be placed until the third darkened bar is complete. Although our original buy stop would have certainly been filled by subsequent mar-
Figure 8.3 Category 3 resistance is used to place stops for two long entries. Chart created with TradeStation111 2000i by Omega Research, Inc.
ket activity, the appearance of a lower resistance point gave us the opportunity to enter the market at a lower level, thereby increasing the amount of profit possible for this trade.
Later on in the day a quite similar situation presents itself. The resistance level defined at point #3 becomes the location for our initial buy stop for entry again on the long side. A bit later, before our second buy of the day is accomplished, we are presented with an equally valid buy point, which is again slightly lower than the original entry point. Moving our buy stop to this new, lower level allows us once again to add roughly $1 per share to the profit potential of the trade.
Any Category 3 resistance that appears on the chart is just as likely to produce a profit as any other similar pattern. The trader therefore should not be hesitant in moving the stop to a level that will be more profitable should the trade move in a favorable direction after entry. The natural tendency is to doubt the validity of a long entry since the market has just defined a lower resistance level in what, by all available information, is supposed to be a rising market. However, if the trend indications from other trading signals remain in a long position one should not hesitate to move the entry order to a lower level.
Figure 8.4 details the development of a similar entry pattern on
Figure 8.4 Sell stops placed at Category 3 support points result in three
successful short trades.
Chart created with TradeStation® 2000i by Omega Research, Inc.
the short side of the market, this time using the volatile Nasdaq 100 index futures as our market example.
Sell windows have opened up rather early on this day from our oscillator indicators, which are not displayed on this chart, leading the trader to first of all begin searching for exact entry points that will provide highly accurate short positions. The first support, identified at 8:55 a.m. at 3,240, comes too early in the day to be useful for the purpose at hand, as it falls within the first hour of the trading session when our indicator routines are still determining the trend for the rest of the day and looking for eventual buy and sell windows. This point is labeled #0 on the chart.
Point #1 appears on the chart on the 9:15 a.m. bar, but the pattern is finished after the 9:30 a-m- bar has been completed, barely placing it within a useful time frame early in the morning. I have marked it on this chart for illustrative purposes.
At 10:10 a.m. our next support point, at 3,275, becomes evident, as the requisite three bars following the pivot bar have been completed, finishing the Category 3 support pattern. At this time our sell stop is moved from 3,252, the point identified at #1, to our new support level at 3,275. Our new short position is established on the 10:35 AM- bar when the market trades through our newly placed sell stop.
Later on in the day point #3 appears, again allowing us to place a sell stop at yet another high-probability entry point at 3,207. This position is filled as the market makes another new low on the 12:10 p.m. bar. This downward thrust places a new low on the chart at point #4, which later develops into another Category 3 support point. A few bars later, yet another such pattern develops, giving us a higher value to use for our next short entry point at 3,180, which is marked #5 on the chart. This order is filled at 2:00 p.m. as the market puts in its final leg down for the day.
FINE-TUNING STOP PLACEMENT
Quite frequently you will observe what is known as a double bottom or double top on a price chart. These are areas where support or resistance has been uncovered at the exact same price levels only a few bars apart. These situations present a very real danger to our method of entering the market. Figure 8.5 identifies a support point slightly above $ 180 at about 10:30 a.m. This same level is identified a second
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Possible Short Entry
Alternate Stop Placement
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Figure 8.5 When placing buy or sell stops, "fading" defined support and resistance levels will avoid orders being filled without support or resistance actually being violated.
Chart created with TradeStation® 2000i by Omega Research, Inc.
time as a support level again a few minutes later. Had a trader placed a sell stop at the exact price level of the first identified support point, the chances are indeed very high that he or she would have soon received a fill on that stop order as the market did indeed trade at the specified price, if only for a very short time. In this instance this fill would have resulted in an immediate losing position.
Also marked on this chart is an alternate stop placement line resting only slightly beneath the original support point identified at about 10:30 a.m. In this instance, "fading" the support level by only a slight amount avoided being filled on a double bottom formation. Had the market continued through the lower stop level and in fact created a short position that turned out to be profitable, the amount of profit given up by using a lower stop for entry is a small price to pay for avoiding an entry into a losing position. This is certainly a point well worth consideration when the trader is formulating his or her trading strategy with respect to fine-tuning the placement of entry stops.
1. The use of support and resistance points for actual trade entry is the single most important concept for a trader to master.
2. By using support and resistance the trader is able to enter after the market has confirmed its next move.
3. Support and resistance points developed by identical chart
patterns have equal probabilities of success when used as entry points.
4. Fine-tuning stop placement to avoid double tops and bottoms can have a significant effect on overall trading accuracy.
COMBINING DUAL SIGNALS, SUPPORT, AND RESISTANCE
"BUY WINDOWS" AND "SELL WINDOWS"
In this and following chapters I will be illustrating buy and sell positions from various indicator combinations. For this reason I will reserve the use of the up and down arrows for actual positions that would be taken under a given scenario.
For purposes of understanding the indicator combinations we will be using, it is helpful to regard signals as given by various scenarios as the opening of buying or selling "windows" during a given time frame. When we speak of a sell window opening we are referring to an instance where an indicator or combination of indicators has identified an area where a sell signal may be taken. Once the sell window has been opened, all that is then necessary for the entry to be completed will be the violation of an associated support point. If a buy window is opened, we will look for the market to penetrate an overhead resistance area to complete the trade entry.
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