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38

trade, the intelligent move would have been to leave the trailing stop at its initial point at 1,476.80, ignoring our questionable resistance point at 1,474 until the situation clears up a bit. Granted, you will certainly encounter situations where the use of these close stops will prevent losses from occurring. Had the market rocketed higher in this instance after the close stop exited the position, our lonely one-tick stop all of a sudden would look like a stroke of genius. However, most traders would prefer to place their stops from a logical sequence of events rather than relying on a random event controlling their trading destiny.

Since we are luckily still in the trade, the next market decline and minor spike upward creates the next resistance point, allowing us to move the trailing stop to 1,473.70 as designated by the dashed line labeled 3. As the market decline progresses we are able to reset our stop at number 4 and then finally to number 5 at 1,465.30, which locks in a significant profit for the trade. The next down move allows a move of the trailing stop down to 1,464.50, where the position is closed out on the next market advance as the prices climb through our stop.

Although by most practical standards it is fairly late in the day to initiate another countertrend trade, it should be noted for illustrative purposes that such a transaction is indeed possible here. Note that we are in a buy window from the series of Percent R buy signals in the area. Thus our buy stop could have been entered as a reversal stop, allowing us to remove another point from the market from the long position entered at the same 1,464.50 level. The market continued to move higher with a potential maximum profit reached at the high of the move at 1,467.50, which is certainly ample room to take our one-point profit from the trade as well as compensate once again for any entry slippage that may have occurred.

Our next trading example using the four-step process concentrates on a day in the life of Qualcomm Inc. (QCOM). This day begins as a sideways affair but puts a good rally together before the day is out (Figure 12.24).

To discuss the detail of these trades more clearly we will first examine the big picture and then take a look at each individual section on a separate graphic.

Our initial assessment of the trend of the day reveals that there is a bit more activity below the filter line than above. The close of the 60-minute bar is slightly above the filter line, leaving us with the initial conclusion that the day is at best sideways with a possible downward

QCOM LAST-1 min 11 00 0=75.180 -S.0C0 -10.63% 0=81.433 H=85.750 L-fil .250 V=253B200 Dual StoChaeHc(7.45.12. 0. 5)

11 8:56 9:21 9:46 10:11 10:36 11:01 "11:26 11:51 4.2:16 12:41 ;1:06 1:31 ;i:56 2.21.At

Figure 12.24 Both a buy and a sell signal are generated on a day that begins as a sideways affair.

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

bias. A second assessment 30 minutes later indicates a sideways day is all that can be expected. With this assessment we are now able to take trades from both the long and the short sides of the market.

As we are able to enter trades on both sides, we first will look at the sell side since it is the first window opened by the dual stochastic indicator (see Figure 12.25). Out initial selling point is pegged at the swing low posted shortly after the 60-minute bar is completed. Gaining no fill as the market trends higher for a time, our sell stop is moved up to the 72.50 area when it is made available by a Category 3 support level. Some time later the position is filled as the market trades through our stop. Our initial stop for this short position is placed first at the dashed line marked 1 on the chart. This is placed al the Category 3 resistance level closest to the actual filling of our order.

Subsequently our trailing stop is lowered to points just above successively lower-placed resistance at the dashed lines marked 2 and 3. There is also marked at this point on the chart a second selling opportunity for traders who are accustomed to adding positions as trades progress. In this instance a second short position can be added slightly above the 72 area.



I r.»J«.HH)TI UIhIU IUI..I.IMJ UUiJlCui

3COM LAST-1 min 11(13/2000 075.106-9.000 -10.69» 0=81.«38 H=B5.750 b=61.250 VS253G200

Dual Stochastic Sell Signal

">: IA.....-3

Wl--14--f

Day Forecast

.A*: Reverse

Dual Stochastic Buy Signal

: aw mm 10:1 :31 10:46...11:01 11:16 11:31 11:46 12:01 12:16 12:31 12:46

Figure 12.25 After the initialshorttrade, multiple possibilities exist for

entry on the long side.

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

Our stop is then progressively lowered to lines 4 and 5 as permitted once again by respective resistance points.

Since we are now operating under a buy window from the dual stochastic indicator as marked, we have the option to reverse or simply exit the position. More aggressive traders will enter a long position as the short trade is stopped out, therefore reversing to a long position. Conservative traders may be more comfortable at this point simply exiting the short position and waiting for additional chart confirmation before entering another trade.

In Figure 12.26 the initial stop for our new long position from the reversal trade lies just below the swing low marked by Category 3 support that occurred immediately prior to the reversal. The dashed line labeled 1 marks this level. About 30 minutes later we are able to raise our trailing stop to the number 2 dashed line, which marks the support placed by a Category 3 support pattern at that point. It is shortly after this point that we have our marked two points where

Figure 12.26 Category support levels allow the movement of a trailing stop that eventually exits the trade.

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

conservative traders may enter or where more aggressive traders may wish to add to their current long position.

Our stop is raised successively to points 3, 4, and 5 as allowed by our Category 3 support points until we are stopped out near the close when the market corrects downward on end-of-session profit taking.

Our next trading example, which concentrates on a chart of QLogic Corp. (QLGC), describes several important situations that must be understood for the trader to effectively trade with these technical tools (Figure 12.27).

As always, we begin our trade analysis at step one of our four-step method-to determine the major trend of the day. As we examine the chart 60 minutes into the day we note that there is predominance of market activity beneath the filter line as compared to that above. Additionally, the close of the 60-minute bar is well below the filter line and quite near the intraday low. Our conclusion is that we will expect the intraday high at this point not to be exceeded for the rest of the day while expecting that new intraday lows will be established.

As an aside, once again we see the breakout strategy discussed



QI-GCLAST-I .--1.003?2O0p C=78344 -39.71.9 -33 64% 06.313 =113.81 L=?5.000: V=2118600 DtrDay ) 69.375

Minute Bar

Dual RSI Sell Signal

-Qirecbonal Day Filter.

Downtrend Predicted

,.......Sell :.. «

Stop Out

1 iSell

-----2

V*Cr-,-

10103 0:56 921 9:46 10:11 10:36 11:01 11:26 11:51 12:16 12:41 11:06 1:31 *1 16 ~r7rS

earlier being quite effective in giving us a quick short entry into the market that is good for at least a $2 to $3 per share profit depending on the exit strategy selected. This type of price activity early in the day with a sharp, violent drop from the early intraday range certainly reinforces our expectation of a down day in this market.

With a downtrend expected for the balance of the session we will be looking only to the sell side of the market for potential trades. Our first selling window opens as a series of dual RSI sell signals appear on the chart. This should make us once again more confident of our short trading approach on this day since for the most part the signals from dual RSI have been the most accurate. We now place our sell stop slightly below the last Category 3 support as marked on the chart.

It is at this juncture that it is necessary to point out what can be a significant problem when trading with short-term support and resistance. Note on the chart that we have placed the stop one tick below the designated support level as described earlier. The placement is a bit below the support level to avoid being placed in a trade if the market should decide to make a double bottom here. But look what happens. The market makes a new low by one tick around the 11:30 *-M-

time frame. Since the market has traded at our stop price, we now have a short position at that price-or possibly higher, as the stop order becomes a market order when it is hit by the market and can be filled at any price.

Figure 12.28 details the trade, which is stopped out for a loss. Note that following the rules as stated for exits we are soon stopped out of our short trade for a small loss as the market trades up and through the next resistance point placed again by our Category 3 formation. Although not a large loss, it is still a negative trading experience.

Retrospectively, is it a better idea to place the entry sell stop two ticks below the support area instead of one? Would three ticks lower be even better? In this case, had the stop been placed just one more tick lower we would have avoided this loss, as we would not have assumed a position in this case. This again is one of those judgment calls that must be made as a function of the trading style of the individual trader. Research into your favorite market will certainly provide valuable information as to the placement of both buy and sell stops around support and resistance areas.

0LOC LAST-1 mill 10(0312000 C=76.344 -39-719 -33.64» ;O=106.313 H=113.013 L=95.000 V=21ie600 Dlr Day Filter<5,60) 09.375:

90.000 69.500

Figure 12.28 Category 3 support is responsible for the placement of the initial entry of this trade. Category 3 resistance stops the trade out with a small loss as the market searches for direction in this congestion area. Chart created with TradeStation® 2000i by Omega Research,Inc.



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