Chapter 23

The Rcvcrsnl Bar fitid Olhcrs

Ts tlnie now to look at some ifiifty minute Intraday [rading. I really want to tear into this chart, because it is vital to show to dissect market anatomy. There will be some valuable lessons discussed as t go through the next series oi tratles.

This cTiapter will delve into a thirty minute corn chart. Tfie lessons can be apjilted to virtuaKy any time frame. I traded this series in corn especially for lilis book, I usually do not tr-ade corn day in and day out. I chose corn because if it can be traded profitably at $25 per round turn, anything can.

30 niNUTE

Start with a down move of tvo successive days into what subsequently becomes a congestion area. How can I know that this is a congestion area?

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Tfiere are a number of ways, and this is a good time to pomt out at least two of them.

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First, Ill coum the swings. J\<vo swings, corisishruj of tour Ing., always constitute congestion. Tfiey look fke this: or \/\/. \ marked them on the chart. In tliis cas( there were tfiree swings during tfie congestion.

Heres anotficr wonderful way to know when a rnarket is in congestion. It utili7cs the concept of a series of reversal bars, a series of dojis or a combinatior of both.

What I waicfi for looks Siko tJiis:

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Nov, Ill sfiow that corn cfiart agaifi. Take a close look at tfie congestion area ori this page.

30 mmrTt:

Notice the alternation of "open high-close low", "open low-close high" bars during the congestion period. Intermixed, bul more often near either extreme of the congestion area, are dojis.

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Equally as impcrrtant as knowing when a market is in congestion, is knowing wfien it is about to break out of congestion and begin irendmg.

Anyone can look back and see that a market has trended, or is now in a trend. But its 3 lot harder to spot when a market is going to start trending.

Ive already shown how tiie beginning of a trend can be surmised by respccdvely buying or selling ih.e breakout of the extreme ot a third successive fiigher high, or a third successive lower low.

However, a close took at the corn cfiart on tfis page wifl quickly revea that no such opporlunity occurred in corn.

How then can it be known thai corn was about to brenk out? How could n person have entered this corn aiarknt before everyone else by spotting the very beginning of tf)e trenrl that took out the corsgestion to the upside?

Markets speak. To those who chart, they speak a graphic language, I have made it my lifes work to be able to understand wha"t the markets are telling me. By learning lo understand tfie way a riiarket speaks, I can better communicate and get in step with tfie market. 1 have learned to paiientfy and carefully listen to ttie markets, let trie show how to read the graphic language tfiat corn was speaking at a couple of very important junctures in the market- The next topic leads into it.

Usinrj Average VoSatifily for a Slop Loss

The reader should nonce that in the corn irades that follow I have switched fforn using an absolute stop loss to using average volatility as a stop loss. The question is, when do you do this?

The only way in which 1 can answer this queshon Is cuniuined in the following discussion,

The piacemeni of stops is a most (fifficuft matter. Thore are many things to consider when placing them. The size of the trading account must certainly be involved. So, too, must be the number of positions already in effect, and their current status; are those positions ahead or behind?

Also needing to be addressed are. how fast is trie market, artd wfiat is the current tick size? Dotfi should properly be taken into account in setting a stop.

How fast is tfie trader, and what kind of turnaround cnn fie exiect from his brokfjf? Although the treder may bo l-gtitening fast in his feaciiotis ) the market, the broker rnay not he, and vice-versa. Cenainfy turn-aroond time must be taken into dccouni when setting intraday smps. Tbe market continues to move regardless of how fas: tfie trader and fiis broker may be,

Anotfier major factor in setting stops is comfort level. If the trader is uncomfortat:lo with tfiL stop, either because it ts too close to, nr loo far from the price action, then :fie stop wilf probably not he eHoctive.

What [ve done here with average volatility used to set stops is to show a way tfiat the market can dictate the stop placement. This is siniply another concept apart from tfie way most traders set stops based some percentage, fixed number of points, or a set arnount of money away from entry.

The concept is not new. There are programs that calculate wiiat Is krown as the "volatility stop" study. Typicaify this is used as a reversal system, but t suspect il*s stmifar enougfi in nature to wiiat Ive done that it coufd be used tor setting the stops using my trading methods. One discussion Ive seen states that the volatility figure is added to tfie lowest close while short, and subtracted from the highest close wfiile fong. This woufd differ from my own work mainly in that 1 add or subtract the volatility from the entry point as opposed to the close. One other difference is tfiai the "volatility slop" uses a multiplier constant to heigfilen the effect of volatility.

I believe that the "volatility stop* would be perfectly adequate for trading the methods Ive shown and wilt sfiow in this book, ff used, I would set its parameters at 5,1. The number 5 would be the number of bars for which to compute volatility, and the number 1 would replace tfie multiplier constant usually used with ifie volatility stop study which is typically 2.8 or 3.1.

At times "voiatifily stop" may place the stop further away ihart average volatility measured frorri thD entry. At other times, it may piece the stop closer since it is computed from a previous bars close.

Sagging Tops and Rising Bottoms

:io MI MUTE

The upper arrow sfiows tfiree successive sagging tops, shows the bar on v./lncfi I went siiort a ten lot, at 246.50. was at 247.50

The lower arrow My protective stop

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Tfic overage volatikty for the last five price bars is 1.10. I must choose either 1.25 or 1.00 as my factor for covering costs. Since 1.10 is closer to 1.00. I chose 1.00.

I know that most of the people reading this book arp [laying niore in commissions antf costs than I do, so I chose a figure of $25 for commissions and costs in order to rleriionsirate the way I haiidled the iraile. 1 entered this trade wilti ifiai in mind. TMo one calbng his own stiots in ifie market sfioutd ever pay more tlian lhat. Anyone paying more than tha sfujiikl not be daytrading at: all.

trade.

Im looking at $25 a rourvd turn. I must covcr costs of $250 for tfiis

To be absolutely safe in covering costs, I must liquidate six of rny contracts at 245.50. At that [)oint, I will place my stop at breakeven. I placed an order in the market to buy six contracts at 245.50 fvllT. About seventy mmutes ot trading later, I was stopped out on my MIT. It was tfie last trading bar of the day.

Notice that with sagging tops, is not necessary !or new tows to occur as it was wlien 1 showed the S&P in chapter 21. fach lower high coums > . "hree successive lower highs yields an entry signal wfen the low of tlie bar thai made tfie third lower high is taken out. The reverse of all this is true for counting rising bo.torns.

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The following day, thn market opered higher, tested the lows, and then began to move up. I nnoved my stop to the previous bars high and was Slopped out of all comracis at 246.25. My score was $50 earned from the six coriLracis 1 had iiguidated esriiec plus another $50 I earned on i\}Q quarter point I made on the remaining four contracts. Whenever I dont lose on a trade, 1 feel that Ive fiad victory in the market. I hate to lose, and so I use tight Slops, and take profits when the market is wiliing to give them to me.

Later dial day 1 tried again to enter the market. Tfie next cliart shows an attempt tfiat failed. The important thing is to realize how it is that I try lo :}ick up the trend while still risking relatively lithe on the trade.

With sagging tops, Im looking for three successive lower highs. If I lind them, I will sell a breakout of the low o( The bar that made the ttiird successive ower higfi.

The opposite of sagging tops are rising bottoms. If I were to go long, I would buy ttie higfi of the bar that made the third successive higher low. That situation might look like this.

30 rtIt4UTE

I tried to sell a breakout of this low

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<- Buy

It could also look like this. Even though a lower low was made, the buy would take place.

However, none of the tecfmiques Ive previously shown would have solved the next problem I Jacod with corn.

Segrnent Counting

1 1.30 rimiTE

Years ago, when I first started trading, I discovered a technique that has stood me well tfiroughout rTiy irading career. \\ involves connecting corrections and double bars.

Take a close took at how Ive connected the lows oi the chart.

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Ive connected a low to a second low. Ive connected the second low to a correction low, and the correction lovy to a double low.