back start next

[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [ 37 ] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52]


I i.iiU-VI.Ii,,,i r.h.iil (DSPTflllOIIUJ !,SI> Slid In.).:* D.ij. Only LA.. Ill

DSP200009 LAST-1 min 07(06/2000 C=1463 40 -17.80 1.20» c.teMO300 H=14S4.00 L=1477.50 V=0

..........Percent R Sell Signals.......................

Directional Day Filter-

I \ \ 4 ,i¥H V m Hl

ategory 3 Resistance


1462.00 1480 00 1 47B.00 1476.00

Figure 12.21 As the market encounters resistance in the vicinity of the Directionnl Day Filter line, Cntegory 3 support is broken, causing entry into the first short trade in the direction of the major trend of the dny. Chart created with TradeStation® EOOOiby Omega Research, IllC.

The initial noteworthy event occurs in conjunction with the price bars approaching the Directional Day Filter line during the 10:45 to 11:30 A.M. time frame. Recall from earlier discussions that this line can function as an intraday support or resistance line, often causing the market to change directions at these points. This chart again displays this tendency, the market is turned lower at this line on two separate occasions within a short period of time. Also at this juncture we receive a series of sell signals from the Percent R dual oscillator, adding to the negative picture for this day in general and this time frame in particular.

With step one, the determination of the major trend for the day, and step two, setting the short-term trend, behind us for the moment, we now look for a support area that will serve as a high-probability location for our buy stop to facilitate market entry. Fading the 1,477.50 support level, the sell stop is placed at 1,477.20 as indicated on the chart by the solid line drawn at that level. The short position is en-

tered at 11:25 A.M. as the market trades through the stop. Note that there are two additional Category 3 support points plotted immediately prior to the point that generated our initial market entry. Although not marked as such on the chart, these are points that could also be used as levels to enter additional short positions, adding to the original sale. Recall that each of these support points carries the same probability of success as any other created by the same chart pattern.

Our protective stop is immediately placed slightly above the most recent Category 3 resistance level at 1,479.20 for an acceptable risk of only two S&P points. This dashed line is labeled 1 on the chart.

At 12:05 P.M. the next Category 3 resistance level allows us to drop the trailing stop to 1,477, labeled 2, which effectively gets to a breakeven trade. The next Category 3 resistance forms at 12:23 P.M., allowing us to drop the stop level down to 1,476.40, labeled 3, giving us a bit more breathing room for the trade. The actual trading price at this moment is at 1,473, indicating that we are maintaining roughly the same risk in the trade as we assumed at the time the position was initiated.

As the market begins to level off, respecting the previous intraday low, we have yet a fourth Category 3 resistance level placed at the 1,474.20 level. Fading this price again, so as not to fall into the double-top trap discussed previously, we place the actual trailing stop at 1,474.50, defined by the dashed line labeled 4. The market trades through our stop a few bars later, closing out the trade at the stop price of 1,474.50 for a gross profit of three S&P points. Note that we speak here of gross profit, not net profit. Slippage and commissions must be deducted from the gross amount of the trade to arrive at a net profit figure for the transaction.

Note at this point that we are now operating in an open buying window as dictated by the recently plotted buy indications created by our indicator using dual settings of the Percent R oscillator. One could certainly be tempted at this point to consider a reversal strategy rather than merely exiting the trade as illustrated. Over the past hour or so the market has entered a boring, sideways, low-volume mood, which in many cases can be indicative of a sideways day. Therefore, we now have another adequate setup for entry into a second trade against the major trend. Figure 12.22 details this trade.

Once again, readers are cautioned that these trades against the trend of the day carry a much higher risk profile than trades generated in the direction of the dominant trend. These examples are presented

5 Ti.ideStdlion Chdrt {D5P?nniHI(J 5ftp «,00 Intl™ 0,,v Only lAo I i

DSP2C0009 LAST-1 min 07/05/2000 01483.40 -17.00 -1 20% .0=1453 Oil H=1494.00 L=1477.50 V=0

• Percent R Sell Signals

7 -


-ZJ- Directional Day Filter-

f Lfl (wlhV.....Sell................rr~-Category 3 Resistance

Percent R Buy Signals Category 3 Support

476.01 -1476.01 -1474.01 1472.01 1470-01 I46B.0I

ctR FastC50.B8.1) 54-44 12.00 68.00 PciR SIOWC75.70.0) 48.67- 30.00 70.00

10:31 10:46 11:01 11 ne 1131 11:46 12:01 12:16 l2:31 12:46 TSi

Figure 12.22 A second countertrend trade is possible as our first short position is closed out. Kemembertbattbesetrades carry a significantly bigber risk level.

Chart created with TradeStation® 2000i by Omega Research, Inc.

for the benefit of those wishing to trade more often throughout the day and who are willing to accept the increased risks while doing so.

Note that at the time of the exit from our first short trade of the day several important formations are present on our chart. First, we are operating in a buy window, since the most recent formations from the dual Percent R are buying signals. Also, we have a recent resistance point available for signal generation.

As mentioned previously, the buy stop to exit the short trade is placed at 1,474.50, slightly above the Category 3 resistance point. However, those wishing to enter a long countertrend trade may simply enter a reverse trade at this point rather than an order to exit the market. In this instance, as will be the case with many of these counter-trend trades, the exit point for the trending trade is the entry point for the counter-trending trade. This is typical largely due to the fact that many of our trending trades will exit under a buying window from a short trade or under a selling window from a long trade.

Our new long position is entered on the stop at 1,474.50. The market now consumes 23 minutes just to rally a single point from our entry, allowing us finally to claim our one-point profit. Again, there is enough left of this rally as we exit to give us room to have moved the exit stop higher to compensate for slippage. The fact that the market consumed nearly a half hour to rally only a single point is significant in that this is a graphic display of the overall weakness of the market on this particular day, especially since this feeble rally came on the heels of a test of the intraday low. At this time this occurrence should further strengthen our already established case for a continued down move for the remainder of the day.

The second and final short position of the day is detailed in Figure 12.23. This trade begins again with step two as a new selling window is opened up by the dual Percent R indicator shortly before 1:00 p.m. Our immediate response is to place our sell stop slightly below the last valid Category 3 support level at 1,474, locating the actual stop at

? Tr.ideStation Chait - tDSP200IJ(19) 5 500 Index - Dap Only LAST-1 r

i SP200009 LAST1 min 07(0512000! C-1463.40 -17.80 -1.20% ¹1493 00: ¹1494.00 L=1 477.50 V=0

Percent R SellSignals -; 148200


Category 3 Support

";isCategory 3 Resistance

- "~4- ---1

-Directional Day Filter-


V; 3r- .sen.....•..........

i ./ .Exit A

v,>f ~e"Y Pi""V "\» ll-./ 1"

"Percent R Buy Signals

PrtRFast(50.88.1) 54.44 12.00 88.00 PCIR SOW(75.70.0) 46.67 30.00 70.00




1476.00 -1474.00 -1472.00 -1470.00 -1 4fift.nn -1466.00


1462.00. •14 0.0 .

1 458.00

12:01 12:16 12:31 12:46 1:01 1:16 1:31 1:46 2:01 2:16 2:31 2.46 3.01

Figure 12.23 Tbe finalsellsignaloftbe trade, wbile taking a wbile to get started, turas out to be tbe best transaction on tbis chart. Chart created with TradeStation® 2000iby Omega Research, Inc.

1,473.70. In a few minutes our new short position is established as the market hesitatingly moves through this level. Note here again that the market is showing respect for the current intraday low at 1,472.50, unwilling at this time to enter the uncharted waters below. For a time the prices are trapped between the intraday low and our previous support area, which was used as an entry point for our trade.

Our initial stop for this trade is the last valid Category 3 resistance plot, located in this instance slightly above the high of the 12:49 PM- bar at 1,476.80, giving us again an acceptable risk of slightly more than three S&P points. An important point becomes evident as this trade progresses. The normal progress of these trades is to move the protective stop to each new, lower Category 3 support level as it becomes available on the chart. In this case, as marked on the chart, it lies just above the 1:17 P.M. bar at 1,474. Technically, this is the correct level at which our stop must be placed to satisfy the strict requirements of our base system. But is this the correct spot for a practical stop?

Looking closely at the formation of the Category 3 point that was used to place the latest stop, marked as the number 2 dashed line, you will note that it was only a single tick that actually placed our stop. Recall from previous chapters that the formation of a Category 3 resistance pattern requires that the high that marks the actual resistance point must have three previous bars with lower highs as well as three following bars with lower highs. Technically, a center bar with a high that is only one tick higher than the six surrounding bars fulfills these requirements. This is almost the case here. Careful observation of this resistance point tells us that the high bar of the formation is only one tick greater than the three previous bars. This same high is also only one tick greater than bars one and three that follow.

With these considerations in mind, the practical trader must question the advisability of placing a stop this close to the actual market. A stop placed this close has a very high probability of being hit, taking you out of the market prematurely. The market forces that take you out of the market in this manner could easily be the result of normal market noise, the normal random price activity present in the market. This is not the type of activity that you wish to put in charge of the balance in your trading account.

Compare this resistance point with the next point, which is also generated by a Category 3 resistance formation. Coincidentally, the price of this resistance is at the same level as the high of the several

previous bars that made up the surrounding bars of the formation that was placed by our now famous single tick. There are very few similarities beyond this point, however. The highs of the surrounding bars making up this formation are considerably lower than the high of the pivotal center bar. This is especially the case with the trailing bars making up the formation, as they drop off precipitously. In fact, these trailing bars actually establish a new intraday low before the formation is completed by the closing of the third bar past the pivot bar. Obviously, in the short period of time that separates these two resistance points, considerably more selling pressure has developed creating the current downdraft in the market.

Our theory of stop placement around resistance points is based on the assumption that these levels develop as a result of significant selling pressure that is able to overwhelm any buying activity at a given chart point. The market must mount a serious attack on a point established in this fashion if it is to prove to us that a trend change worthy of causing a change in our market position has indeed surfaced.

Obviously, the selling pressure is several times greater at the second resistance point than the similar forces that existed when the first point was created. It is entirely possible in the first instance to be taken out of the market simply by random price movements. On the other hand, considerable market strength will need to be generated to cause us to exit our position in the case of the second resistance point. There is little debate as to which point you would be most comfortable using for your stop.

It is wise for the experienced trader not only to immediately recognize these important points as they are formed, but also to be able to subjectively evaluate the ultimate consequence of the utilization of each point. In this case, for the purposes of this discussion, we assumed movement of the stop by strict system rules, even though the resulting stop placement places our order dangerously in the path of random price movement.

The practical trader will be much better served by closely observing the situation surrounding resistance points as they are formed and reserving judgment as to the actual placement of orders as a result of these observations. When a point such as the first one in our current discussion surfaces, it is usually wise to pass on placing a stop at this specific point in favor of waiting a bit longer for the market to define more clearly its intention at this point in time. In the instance of the current

[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [ 37 ] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52]