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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Most reversals take place after three consecutive higher closes or three consecutive lower closesSUMMING UP THE PIVOTS The pivot levels work mainly because of the psychology pain/pleasure cycle that perpetuates the markets each day. Traders who follow only indicators will chase a position when it is already halfway to three-quarters the way off its pivot, and it is these traders who provide the stop losses to perpetuate the next cycle of market movement. If you rely on only indicators for your entries, instead of using the price action of the pivots, you w ill get in and out of these cycles too late, and you won't make any money trading. What is nice about this system is that traders don't have to watch it very closely once they are in a position, I'm not an aggressive trailer of stops. I like to get in a position, set my parameters, and then focus on other things. Depending on the traders* work situation, they could do this at the office, especially on the West Coast, and especially if they had an order system that automatically bracketed trades. This way they can place the parameters and then go to the next meeting or appointment. Let the parameters babysit the position. This is much better as well because it takes human emotion out of the equation. SCALPER BUYS AND SELLS WHEN ONLY A QUICK CONFIRMATION WILL DO IDENTIFYING AND PROFITING FROM CHANGES IN TREND WITHOUT CATCHING A FALLING KNIFE OR STEPPING IN FRONT OF A FREIGHT TRAIN In watching the markets over the years I've observed that most reversals take place after three consecutive higher closes or three consecutive lower closes, and this tendency is valid for all times frames. The key to this setup is that it is based on consecutive closes and not just intra-day or daily high and low price action for an individual price bar on a chart. In other words, the highs and lows are not important, Vm not interested in three higher price highs or three lower price lows. 1 want to see where the action settles or closes, because that is where the rubber meets the road. The hard way to follow this play, especially intraday, is to stare at the charts and keep track of consecutive lower or higher closes until you get three in a row. This can cause a person to go bug-eyed, as well as insane, and is recommended only for those who get a thrill from the little things in life. I'm not a big fan of staring at charts and would be a prime candidate for the mental hospital if 1 did this with the naked eye. Instead, I've developed a simple indicator in TradeStation that will paint the first bar in the sequence after the third bar has met the criteria for a signal. Once I see the paint bar, I just place a market order, and I'm in the trade. Even better, 1 set up an audio alert sw that if Frn down the hall. I'll hear the signal and come back to my computer to place the trade. This works when I'm on the phone with my wife as well, though she has yer 10 appreciate the importance of (he signal and my urgent need to hang up in the middle of our conversation. Such is the life of a trader. For the indicator, I did add one key filter, I found at times I could get shaken out of a play that was consolidating (i.e.. a bull flag) when prices made a series of lower closes wiihin that consolidation. So, if there are three lower closes, but this price action does not go below the signal bar's low, then the signal is ignored. For this indicator on a long signal, then, the trigger bar would be the first bar that has a higher low than the previous bar. The next bar that closes above the high of this trigger bar paints this previous low bar which now becomes the swing low point, [n most cases all of this happens with three higher closes, but there are times when it is not as clean and these instances are taken into account with the one confirmation that really mattersprice. 1 use this signal in various timeframes. For scalping the E-mini S&Ps, 1 like to use a 233-tick chart, because the signals are very fast. On the mini-sized Dow, I will use a 144-tick chart for scalping and a five-minute chart to catch the one or two reversals that set up on any given day. For swing trades, I will use both 60-minute and daily charts. 1 like to use this primarily on the stock index futures, and the major currency pairs, but it works just the same in any market, in any time frame. It is simple and is based solely on the price action. I will also use this signal for individual stocks that I am following. TICK CHARTS ARE BEST FOR SCALPING Let's quickly review what a 233-tick chart is for anyone who hasn't used one before. This type of chart forms a new bar every time there are 233 trades executed. It doesn't matter what the size of the trade is, just so long as 233 trades cross the tape. When the action is fast and furious, bars will be formed at an accelerated rate. When the action is slow, it will take longer for an individual bar to form. I like to use these charts when I'm scalping for two reasons: First, they are faster than regular time charts when it really matterswhen the trade frequency accelerates. In comparison, a two-minute chart is going to form a bar every two minutes, regardless of how fast or slow the trading is. With a tick chart, when the trade frequency slows down, so do the signals that are firing off in this timeframethus these charts naturally keep a trader out of the market when there is nothing going on. Second, traders in the pit have no concept of time with respect to a two-minute or a five-minute chart. They are focusing on the actual frequency of trades, and a breakout on a two-minute chart means nothing to them. Why do I use a 233-tick chart versus say a 235-tick chart or a 287-tick chart? There is a simple explanation for thisI like to use tick charts that are lined up with the Fibonacci numbers. Does this mean that a 233-tick chart is better than a 235-tick chart? I seriously doubt it. The Fibonacci numbers are clean, useful and make .sense, and that's why I use them. A couple of example plays with tick charts are shown below. TRADING RULES FOR BUYS (SELLS ARE REVERSED) L Set up a 24-hour chart on intraday charts so the overnight activity can be accounted for in this indicator setup. This can be used in all timeframes. The larger the timeframe, the larger the parameters and potential move. For daily charts 1 will use the regular session hours. 2. After three consecutive higher closes, 1 go long at the market, at the close of the third bar in the sequence. 3. The trade is valid until three consecutive lower closes occur, at which point I exit the trade. If the market is still open for an intraday trade, 1 will simultaneously exit a long and establish a new short position. I don't use a stop loss on this for intraday chart trades because the reversal signal is my exit strategy, whether it is a loss or a gain. For daily charts I will place a stop at the low of the bar that caused the signal to fire off, which is the first of three in the sequence of closes. 4. If I'm in an intraday trade {15-minute chart or smaller) and the market closes before giving an exit signal, [ will exit at the market at 4:10 p.m. Eastern. 5. For timeframes that are 60 minutes and above, 1 will stay in them overnight and exit at the next signal. This could be the next day for a 60-minule chart, and it could be a month later for daily charts. SPECIFIC EXAMPLES OF SCALPER BUY AND SELL SETUPS E-mini S&PDecember 2004 Contract October 3, 2004 1. Figure 8.1 is a 233-tick chart of the E-mini S&Ps, which is one of my favorite timeframes for taking quick scalp trades in the market. The spot marked 1 on the chart is a little to the right of the painted bar in question. The paint is added by TradeStation and it is the thick black mark that covers the bar. This bar is painted because it is the first bar in a series of three with consecutive higher closes. 2. When I see the paint bar signal, I go long at the market. 1 am filled at 1133.25, which is where we closed at point 2. which is the close of the third bar of this series of higher closes. (This will get easier, I swear.) 3. I am now in the trade until I get a signal that a reversal has developed. Later in the trading session, I get the next paint bar signal, which indicates that a series of three lower closes in a row have taken place. I place an order to sell my long position at the market. Note that the next signal will not show unless it is a reversal. There are a series of many higher closes during this rally, but none of them constitutes a reversal, so they are ignored because the original signal has already fired off. 4. I am out at 1138.50, which is the close of the third bar in the series of lower lows at point 4 on the chart. The gain on the trade was +5.25 S&P points, or $262 per contract. It is interesting to note that during this trade all the oscillators were measuring overbought near the 1135.00 level, which would have gotten some traders out and caused other traders to start going short. Using this setup, the only thing that matters is the price, which, in reality, is the only thing that matters. E-mini S&PDecember 2004 Contract, October 5, 2004 1. On October 5, 2004. I got a short reversal signal near l;00 p,m. Eastern on the 15- minute ES chart, and 1 entered at the market right after the signal fired off (see Fig. 8.2). 2. I am filled at 1137.00. I'm now waiting for the next reversal signal to cover my short and go long. 3- As we approach 3:00 p.m. Eastern we get a signal, and I cover my short and also go long at the same time. 4 My fill is 1134.00. I'm oui for +3.00 points on the S&P play, and I have established a new long position. 5. There isn't another reversal signal until near 8:00 p.m. Eastern. However, because this is off an intraday chart (15 minutes or less), I exited this position at the mar ket at 4:10 p.m. Eastern, and I was filled at 1133.75 for a loss of -0.25 points. 6. Some traders I know like to watch the action 24 hours a day, and they would stay in the trade until point 6. They would have gotten out at 1136.50 for a gain of +2.50. I don't recommend this. The market action in the stock index futures after hours is slow and irritating, and there are many other things Td rather do with my time. If you want to actively trade after 4:00 p.m. Eastern, then by far the best liq uidity and opportunities are in the currency markets, I prefer the forex cash mar kets in this regani because there is more liquidity in the various currency pairs during this post 4:00 p.m. timeframe. When markets are active and liquid, they are tradable. When they are quiet, let them be. E-mini S&PDecember 2004 Contract, September 30, 2004 1. At 12:30 p.m. on September 30, 2004,1 got a signal on the 60-minute ES chart, indicating that a reversal was in place (see Fig, 8-3). The bar that is painted is the 10:30 a.m. bar. Remember, even though the 10:30 a,m. bar was painted, the signal didn't actually fire off until the close of the third bar at 12:30 a.m, (the 10:30 bar is the first bar, the 11:30 bar is the second bar, and the 12:30 bar is the third bar). 2. At 12:30 p.m. I go long at the market, and I'm filled at 1114.75.1 am now await ing the next reversal signal in order to exit my position. 3. I get my next signal a few days later on October 4. 4. I exit at 1136.50, for a gain of +21.75 S&P points, or $ 1,087.50 per contract. The 60 minute chart is great for catching swings that last anywhere from 2 to 5 days. This is a great setup for people who are holding down a full-lime job and don't have time to stare at the markets all day. In additiont this is a great setup for peo ple who are day trading and are currently losing money. This 60-minute setup forces discipline and prevents a trader from over-trading, which is by far the num ber one reason why most traders fail to make money in this profession. E-mini S&PSeptember 2004 Contract, June 28, 2004 1.On this daily chan of the S&Ps, a signal fires off on June 28t 2004, which paints the June 24 daily bar (see Fig. 8.4). (June 26 and 27 were the weekend.) 2,I go short at the close of the third day, which is what triggered the signal. I'm in the trade at 1132.50. I will now stay in the trade until I get a reversal signal. For a stop I use 1153.50, which is the high of the June 24 bar. In my experience the actual stop is rarely hit because a reversal signal will fire off before the markets reach that level, X On July 28, a month later, 1 get a reversal signal that paints the July 24 bar. 4. I exit at the market on July 28 at the close. I'm out at 1096.00 for a gain of +36.50 S&P points, or $1,825 per contract. Again, this setup is great for people who are working and don't have time to stare at the markets all day. I also think it is important for full-time traders to have two accounts, one for day trading and one for swing trading. During a time when a trader's day trading isn't going well, it is possible to catch a good move in the swing trading account using setups like this |
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