Chapler 19

There is a definiie logic and reasoning behind the way I iracie, fll explain it in this chapler. Perhaps by knowing why I do what I do, it will be possible :o emulate what it is Im doing.

Al Ihe very outset of this book, I mentioned that the most fundamental concept that woufd be shown is how to recognize what chart looks fiko ust prior to an important hreakouh In the next chapler, km going to sfiow numerous e:xamples of that as a sort of review of the trading metfiod Tve been teaching so far. But first lei mc explain what 1 think is happening in the market, and my rationale for doing what I do.

Pivots

Because f rio not have the advamages of trading on the floor, I am forced to corTipensatc for the disadvantages oJ trading from a live data feed. I mentiopied this in an early chapter of this book.

I noted I could not utilize the sarne pivot points that were used on the floor because of the time delay my trading must incur as opposed to ifie true real-time trading tfiai takes place in the pit.

IMow here is my version of what is happening is taking place on tfie (loor.

this IS wfiai I visualise

When 1 see groupings of opens, closes, highs, and lows, alf in ttie same place, at the same price level give or take a tick or two, I feet that diuse arc the natural support/resistance points down on the floor. I call ttiem pivots. However, as stated earlier. I cannot trade these because prices can move significantly away from these levels from ifie time 1 react tu what I see, to the time my order is able to reach the floor.

Here is what those congestions look like.

<-

<-

When ihrjse events take place near one of my entry signal points, I fee ih-at one of tvvo things is about to happen:

1 . Tfie floor Will drive prices to the extreme, and ihen stoj) there. In other words, jjriccs wiEl test a higfi or low signal point.

2. Tfie floor Vkill drive prices to the extrcMiie and then the [lublic W]ll drive tfiem past ifie extreme. In other words, there wili be a bruakout of a signal point.

My tecfmiquc is to straddle these corujcstiuns. W"lGn [inces start to move. I wifl lose the points the lloor traders can make beiwern the centef of

the congestion and ifie outer limits of the congestion, tfie flour due to the time delay I am faced witfi.

fiae -o give ti:ese to

Ific floor drives prices up to the extreme and furtfier. 1 can expect to make a small prolit on distance between the outer lirniis of trie cnrigc-stion and tfie ilidt constitutes tfie entry signal.

VJhai fiapfiens at the oxireme determines any additional (jroJitabilfty in the trade, Its important re lollow closely what af>out lo say,

T!cre must be at least seven to ten ticks between the l>reakui,:t oi the congerdion and the extreme for tins concept to work.

At the breakout of tfie congestion, I wilf typically enter with three cniiiratd-sets. As snofi as I see S 70 to $100 gain ori the trade. I call in rny order to liquifiaie one or two contract-sets. At times, I have a resting Ml f order ai tfie 570 to $ 100 level.

In the situation where 1 liqoidnh? two eoiitract-seis, I have cuverc<f my costs and have earn[>d a small profit, \ immediately move rry skip to pLill the third contract-set to breakeven,

Al tfie breakout of V/fiat constituted the entry signal I will make mo.ey as the public comes into the trade.

fiecalling that what constitutes an entry signat is a stgnificarit event on die dtiily chart, there is a reasonatjle expectation th,at at the breakout of a trading rartge, a 2-3 high or low, a Ross hook, a ledge, th.e highest high or owest low of the last three days, yesterdays high or low. etc., there will bo an entry into tiie market by the public - daily traders, and daytraders. Their

entry into the mafket viti drive prices lurtfier in the direction of tf-ie trar.ie in which I am already positioned. Their entry vill give me profits on some of my contracts, provided Im still in the trade and have not been slopped out of my third contract-set when [ protect it at breakeven.

Tfiere will be a significant nuniber of tin"iES I will tie stopped out at breakeven on the third contract set. That is not a problem, f dont have to hit a home run every linie I step uf) to the plate. I wili at least have covered rny costs and made a small prolit. I will be alive, and ready to try again at a later time.

Just look at ct I ] tlie Opens, closes bigJis and lows ckisterpd at tbe leucis sboun bg llie arroui?.

When I see nnoUicr S70 to 5100 of profits on rtty third contract-set, I will move rny protective slap to lock in fifty percent of my unrealized paper profits. IVIost times, tiiis Stop will be taken out soon after placenient- I am happy with this SJtuation. I do not fret over what 1 couldvo mode had I stayed in, or kept my stop lurtlier back.

Several times a month, prices wifl take off and never look hack. That is when the market wifl hand me a fat profit. Wfien that fiappens. I trail my iptop. either nccordinq to an <jffset moving average that shows containment, or by placing it just outside of natural support or resistance points.

I consider continuation trades at well defined Ross hooks or fedges, but I always bear in mand that additional contracts entail additional risk. Continuation contracts always carry the risk of my losing everything Ive already worked so fiard to earn.

When tfie public enters the trade, I have achieved the same advantage over tfie daily trader as tfie floor trader has over mc. By trading the breakout of the trading range that occurs iust prior lo the breakout of the GJ<treme (my entry signal). I have in effect faded the daily trader, f end up selling when ho is buying, or buyifg when he is selling. If the entry of daily traders is of sufficient magnitude to drive prices strongly in tfie direction of the trade, tfien my thifd contract-set will reap large profits.

Chapter 20 Concrete Examples

I am trading the breakout of congestion prior to one of my entry signals. What specilically am I looking for? What do tfiose congestions look like? The answer will result in many successful trading opportunities. Watch carefully,

A niarket gafjs and looks like Ihis:

Opnn

Vesterdays liigli ->

Tliis is the intraday iignal

Okay tu buy liere

Open

Bretikuiit -) Pause ->

Opt 1 1 h igJi r iiik cont inufi t ion add-OTf?

<-Buy

This is tF)c intraday signal

Open J

This type of entry is valid on nujnr » internediate sitrnal.

Todays open ->

->

<" buy a LreakiTJul of yesterday )i ]i.

Note retrcenent to yesterdays congestion. Tlitire uore not enouyh ticks auaildble between t}ie congestion and tlis to warrant an nntry prior to a breakout of tke IncjJi.

days ayo . ->

Higli risk add-eiss are first tine breakouts of t}ie

of tuD days affOj . .

or yesterdays liih.

Zwi time througli is better.

! .

<- Veslerd.ejs ki<j]i,

>

>

,1

I i

rt

A

ftl

of Lliis canr/estion .

tyjics of entries are valid on ay}\j major or illterneit iate ii iyiia Is .

Nicjli tuo

days ayo. >

C- Vesterdays

Uuy A breakout yesterdays t! h igh.

1st -> tine.

I- /1

J IT

1

4\

- -time

"1

<" Cny a breiikrmt tilt; ll ijU

Tbislouer set of pricD bars yields mch better tradivKj situation for add on con tracts.

12 5