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Indicators like moving averages work amazingly well on trending daysTrending versus Choppy Markets For the most pan, the setups we just went through cover trending markets, I also wanted to take a look at choppy markets to show how the pivots work under those circumstances. Figure 7.16 shows the mini-sized Dow on a day where it stayed locked in a confined, narrow trading range through the majority of the day. In fact, most of the initial move down happened before the 9:30 a.m. Eastern open for the cash markets. I also inserted some basic indicators onto this chart to show how far they can lag behind on a choppy day versus a setup that is based purely on price. The indicators I'm looking at are basic exponential moving averages as well as an RSI index. This doesn't mean these indicators don't have any valueit's just important to keep in mind that, for the most part, an indicator-only based trading approach is a lagging approach, and this fact is heightened on a choppy trading day. 1. As the markets chop along and the volume on the ES chart continues to run under 10,000 contracts, this becomes the appropriate time to set up the pivot plays in the following chop-enhanced manner (see Fig. 7.17). At point I the YM is quiet, and I am looking to fade a move to the nearest pivot level. I don't want to sit and stare at the markets while this mind-numbing action unfolds. Therefore, I place a buy limit order at the nearest pivot level below current price action, plus three points, so I'm just in front of the pivot. [ also place a sell limit order at the next level above current price action. 2. The sell limit order is hit first. I came close to the buy limit order but didn't quite make it. Once the sell limit order is hit, I place a 20-point stop. My first target is a mechanical 10 points away from my entry, and my second target is the next pivot level below. It is a weekly pivot level at 10532, so I would set up a buy limit order at 10535 to cover the second half of my short. 3. Both of my targets are hit, and I am taken out of the trade. Note that when the moving averages finally crossed over, the markets were almost at our final target. Indicators like moving averages work amazingly well on trending days, but they are a killer on choppy days. Price rules on the choppy days. This example shows something that traders will notice quite often when they trade this system: They will be trading exactly the same levels multiple times during a given day. The level at which a person would get long on a decline is also the level where a trader would close out a short* and vice versa. Let's take another look at the same chart (Fig. 7.17), but we'll look at all the setups that occurred that day. 1, At point 1, the YM falls to one of the weekly levels, but doesn't quite touch it. I manage to get into the market long because my limit buy order is the weekly level +3 points. The weekly level is 10532, so my limit buy order is placed at 10535. I'm out for + 10 points quickly on the first half and then bring my stop up to pivot -3 which is breakeven -6, 2, At point 2 we come up and ease just through the daily midpoint. I am out of the second half of my long on a limit order to this level. Note that the moving aver ages have barely crossed higher only when the markets have reached the target, I try to reverse and short, but the market moves too quickly* and I miss the short. One way around this is to keep a resting order in for the stop as well as a new position. If traders are long 10 contracts and want to reverse and go short when they exit, then they just set sell limit order for 20 contracts. This way traders will exit their long and establish a short position simultaneously, 3.For point 3 I am bidding long for a decline back at the weekly level +3 points. The weekly level is 10532, so my bid is that plus 3 points, which is 10535. When two levels like this are close together (by at least 10 pointsin this case a weekly level and the daily pivot), 1 will place my bid with the level closest to the price action. 1 am filled on my long. The market eases through and trades around this level for half an hour My stop is not hit, though it comes close. My initial target for half at 10 points is hit quickly, and 1 trail my stop. 11 is not until a couple of hours later that my second target is hit at the midpoint. This is an important note: Some of these trades will last a few hours in duration, while others can last 10 minutes. The key is to wail for the levels to be reached and not try to hurry things along or get out because of anxiety or boredom. Although human emotions are a good idea in building relationships with other people, in trading, they have to be ignored, 4. 1 am out of the second half of my long over three hours later, at a daily midpoint level. Since this is a choppy day, 1 just reverse and go short, placing the target on the first half of my position 10 points away from my entry. My second target is the next level below + 3 points. 5. The market actually moves quickly, and I'm out of the first half in 15 minutes and the second half another 15 minutes after that. 1 reverse and go long and set up the same parameters, +10 points on the first half, and back to the other pivot on the second half. 6* I'm out of the first half quickly for +10, and the market continues to trek higher into the close. The market doesn't quite reach my second target, and I end up getting out at the market at 4:10 p.m. Eastern, a few points below my target. Note again that by the time the moving averages crossed higher, I was already out of half my position. TRAILING STOPS IN THIS FASHION IS THE KEY I'm not a big fan of aggressively trailing stops. By this 1 mean that if the market moves in my favor 1 YM point, I will keep my stop static instead of then trailing it up by one point. This auto-trailing stop strategy generally will stop a trader out on the first normal retrace-ment, and these are moves I'm willing to sit through. However, if I've established multiple targets and my first target is hit, then and only then will 1 generally move up my stop to protect gains on the entire trade. For pivot plays, I treat stop movement the same on both trending and choppy days. I'm just waiting for my first target to get hit. Once that happens, then and only then will 1 move up my stop. 1* Here we have our original 20 stop from our long entry on a decline to the weekly pivot + 3 points (see Fig. 7.18). 2* If this was a trending day, then 1 would wait until my first targetthe next pivot levelis hit. At that point I would trail up my stop. On a choppy day, my first target would be +10 points on the YM, so in this example that would mean that my stop would have been moved up sooner, right after my first lower target was hit. TIPS AND TRICKS FOR USING THE PIVOTS The key with this setup and all the setups I use is that the trader gets everything prepared on his or her chans in advance of the opening. Once it is sei up, all the trader has to do is watch and wait, or better yet, utilize audio alerts to give the trader a heads up that a setup is either forming or firing off. With respect to pivots, traders can place orders in advance, as the exact targets, entries, and stops are known before the trade is entered. This way the traders can also focus on other things if they come up. When the traders hear the alerts going off, they know that it is time to go back to their charts and see what is going on. There is no chasing. The orders will either get hit or they will not. This system, as well as all the systems I use, is constructed in such a way as to naturally enforce the mindset of a professional trader, which is the only consistent way to make money in the financial markets. The important thing to know about midpoints is you don't need to use them all the time, I use them on days when the distance between two YM daily pivot levels is greater than 40 points. This is a general rule, and it is okay to use them if the pivot level is only 30 points. If the pivots are closer together than 30 points, the midpoints don't play as much of a role because the markets will move straight to the next pivot since they are so close together. On my charts 1 typically use a black background, which can't be shown in the context of this book. 1 then make the daily pivots yellow, the weekly pivots light blue (cyan), the monthly pivots purple, and the midpoints white, 1 also make the central pivots solid lines and the rest of the pivots dotted or dashed lines. This way it is very easy to pick out what the markets are butting up against. The use of pivots has gotten a lot easier over the years, 1 used to calculate these manually by using a calculator, and then eventually switched to an excel spreadsheet where all 1 had to do was enter the high/low/close, and the spreadsheet did the rest. However, I still had to manually draw the horizontal lines on my charts each day, and this took the good part of half an hour There is software that will calculate the pivots for a person automatically, but it generally uses the wrong timeframes and can create errors because of bad ticks, I'm ana I-retentive when it comes to this, and I have to manually enter my pivots each day I want to make sure they are correct. I finally found a programmer who could help me out on this, and the end result is a piece of software that I use now for both eSignal and TradeStation. The software is set up with the colors I like, it labels the levels accordingly as daily, weekly, midpoint and so on, and I can manually enter the high/low/close. Once these numbers are entered, the software will place all the pivots where they are supposed to go in seconds. For more information on this and other trading software visit www.trade-thema rkets .com. WHAT ABOUT FIBONACCI NUMBERS? One question I frequently receive in regards to the pivots is how they relate to Fibonacci retracement levels. For the uninitiated, Fibonacci numbers are used by traders to determine support and resistance levels, with the most commonly used retracement levels being .382, .50, and .618. In my experience, sometimes these work great, and sometimes the market doesn't even know they exist and blows right through them. However, I do like to see where the Fibonacci cluster numbers are on any given trading day. These are more accurate than 160PART TWO Specific Intraday and Swing Trading Setups regular Fibonacci numbers because of the use of more data points and the way the Fibonacci ratios are calculated. To get these numbers takes a lot of work, and for a while 1 calculated them myself. Then I discovered Carolyn Boroden's work at www. sy ntmt.com and from then on 1 just subscribed to her service, as this is her area of expertise. She works on both the time and price axis of the markets using the confluence of Fibonacci ratios. For price she runs retracements of prior swings using the ratios of .382, .50, .618, and .786. She also runs price extensions of prior swings, which are essentially retracements beyond 100 percent. For extensions she uses the ratios of 1.272 and L6I8. Carolyn also runs price projections comparing swings in the same direction. For projections she uses 100 percent and 1.618. In doing this she runs all possible levels from the key swing highs and lows in a chart and looks for the confluences. When she sees a confluence* these become the key levels in the markets to buy and sell against. For me, Pm interested in the bigger levels found on 60 minute and daily charts, and I use these mostly for swing trading. However, there will be days when these clusters line up with some of the daily pivot levels, and of course on these days those particular levels become that much stronger. I also like to look at these Fibonacci cluster levels on other markets, as they provide key levels across all markets. Let's look at a few examples from Carolyn Boroden's work. Mini-Sized DowJune 2005 Contract April 6, 2005 Figure 7.19 is on the 15-minute Mini-Sized Dow Futures contract. You can see the obvious uptrend that developed from the April 4 swing low. For this reason, we wanted to focus on setting up clusters on the buy side of the market. We saw a nice zone develop between 10489 and 10492. This zone included the coincidence of a 1.618 price extension, a .50 percent retracement, a 0382 retracement of another swing, and a 100 percent price projection of a prior corrective decline. The initial low was made directly within this cluster zone at the 10489 level. From there, we saw a rally to 10578 or 89 points. Euro FXJune 2005 Contract April 27, 2005 In the 5-minute euro currency example in Figure 7.20, we found a confluence of 3 key Fibonacci price relationships between 1.2970 and 1.2971. This included a 0.618 retracement of the 1.2961 low to the 1.2988 high, a 0.786 retracement of the 1.2966 low to the 1.2988 high, and a 100 percent price projection of the 1.2984 high to the 1.2966 (swing) low. The actual low was made at 1.2972. The initial rally took you to 1.2990. Mini-Sized DowJune 2005 Contract, April 4, 2005 For entries into the market, we ideally want to set up price clusters in the direction of the trend in the timeframe we are trading. We sometimes use counter trend clusters for exits or to tighten up stops on a position. The example in Figure 7.21 in the Mini-Dow futures contract shows a confluence (clustering) of at least 5 Fibonacci price relationships between the 10132-10141 area. The focus of these leveJs came in between the 10132-10136 area, [n this case the actual low was made at 10140. A trigger for an entry against this zone could be as simple as taking out a prior bar high. At that point your initial stop could be placed either below the low made prior to the trigger (10140) or below the low end of the cluster zone (10135). The initial move off this cluster was 58 points. These examples for Carolyn's work show how these Fibonacci clusters act as support and resistance levels in the markets, and I use them intraday just as 1 use the pivot levels. They can also be used to initiate swing crades on larger timeframes, as these can be used on any timeframe, from a 3-minute chart to a weekly or even a monthly. |
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