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It is important to position size correctly for swing tradesTHE SQUEEZE: GETTING POSITIONED FOR HE BIG MARKET MOVES. DAY TRADING VERSUS SWING TRADING The squeeze, in addition to the scalper buys and sells, is a setup that I use for both day trading and swing trading. Vd like to take a moment and discuss both of these trading styles. I like to focus a portion of my trading on scalp plays, where I'm jumping in and out of the market with a little piece of profit here, and a little piece of profit there. I call these my bread and butter trades, and my primary focus with these trades is the creation of monthly income. However* I also like to focus a part of my time looking for trade setups that are longer term in nature. By longer term I'm referring to positions that I will be in for a few days to a few weeks, or possibly even a few months. Any fund manager who is reading this is grinninga few weeks is still extremely short term for them. However, this is one of the great benefits of being an individual trader. There is much more flexibility concerning getting in and out of positions in a shorter timeframe. The benefit of these types of swing trades is that a person is in the market and already positioned for the move. The markets spend a lot of time in trading ranges, building up energy for their next major move. By the time the move fires off, it is usually out of the blue and violent, leaving many day traders behind. This includes the times when a market will gap open and then spend the rest of the day stuck in a narrow range, totally bypassing the day traders. 199 That's why we call this move a gap and crap. By keeping some exposure in positions on a swing type basis, 1 will frequently participate in larger moves (hat leapfrog over many of the day traders. The secret to swing trading is realizing that being positioned is half the b&tle, and not stressing out over a position that is not working out right away. The markets never break when they are expected to, and they will do so only when they are good and ready, usually when the greatest number of people are unprepared. Sometimes being positioned means waiting for weeks for the move to finally unfold. This requires patience and the ability to step aside and not obsessively stare at the charts all day. This is a huge problem for most traders. They sit back, they watch the charts, they get emotional, and they get faked out and close the trade. Typically, once that process has completed itselffaking out as many traders as possiblethe markets will make their move. If everybody is expecting a move, then everybody is already positioned for it. If everybody is positioned for a big down move, then everybody is already short and there is no one left to sell. It's a great system. It's also how the markets always have worked and always will work. One of the best trading books I've ever read on managing swing trader anxiety is called How I Made Two Million Dollars in the Stock Market by Nicolas Darvas. This book was written a few decades ago and remains one of my favorites. It's a quick, easy read and very entertaining. For anyone who has trouble hanging onto swing positions and jumping out too early, this book is a must read. It is important to position size correctly for swing trades. In general, if traders cannot sleep because they are worrying about their overnight positions, then they are trading too large in relation to their account size. Swing trades have larger stops, and position size must be reduced accordingly. There is a very easy way to manage thisestablish a monetary stop and work backwards from there. For example, if traders are not willing to lose more than $500 on a trade, then all they will have to do is look at the parameters for the setup and do the math to figure out the position size. Using $500 as a benchmark, a day trade that requires a 20-point stop in the mini-sized Dow futures would equate to a position size of five contracts. However, if a swing trade in the mini-sized Dow called fora 100-point stop, then these same traders are going to use one lot. Monetarily these stops are identical because of the reduced position size on the swing trade. REDEFINING VOLATILITYHOW NARROW IS NARROW? The squeeze takes advantage of quiet periods in the market when the volatility has decreased significantly, and the market is building up energy for its next major move higher or lower. This indicator was introduced to me by my trading partner, Hubert Senters, and it has become an integral part of my own trading plan. For students of Bollinger Bands, periods of low volatility are identified as the times when the bands move closer together This is always great in hindsight, but in real time, how does a trader know that the current narrowness is really narrow enough to qualify as low volatility? This setup answers that question by adding the Keltner Channels as well as a momentum index oscillator. For readers who are unaware of how these indicators work, 1*11 take a few moments to explain them here. Bellinger Bands are a type of envelope that is plotted at standard deviation levels above and below a moving average. This produces an effect of having the bands widen during periods of higher volatility and contract during less volatile periods. During periods of lower volatility, in sideways moving markets, the bands contract toward the moving average. Kettner Channels are based on a standard moving average. The actual band lines are offset by a positive and negative standard deviation value from the central moving aver-age value, to provide upper and lower bands. While the Bollinger Bands expand and contract as the markets alter between periods of high and low volatility, the Keltner Channels stay in more of a steady range. The momentum index oscillator is used to estimate the direction, velocity, and turning points of market movements. Make sense? If not that's fine, I don't understand how electricity works, but I know when I plug my computer into an electric outlet, ii will turn on. Now let's look at how I use all this for a setup. The quiet periods I'm looking for are identified when the Bollinger Bands narrow in width to the point that they are actually trading inside of the Keltner Channels. This marks a period of reduced volatility and signals that the market is taking a significant breather, building up steam for its next move. The trade signal occurs when the Bollinger Bands then move back outside the Keltner Channels. I use a 12-period momentum index oscillator to determine whether to go long or short. If the oscillator is above zero when this happens, I go long; if it is below zero, I go short. These are all canned studies that come with most charting packages. For the parameters, 1 just use the default settings on TradeStation. These readings are 20 and 1.5 for the Keltner Channels and 20 and 2 for the Bollinger Bands. My partner Hubert also took an extra step and turned all these into an indicator, which makes it easier to read on the chart, which I explain in a moment. GETTING THE HEADS UP FOR A POTENTIALLY LARGER MOVE BEFORE IT OCCURS 1 use the squeeze signal on various timeframes, as I like it for both day trading and swing trading. On the mini-sized Dow, for example, a squeeze on a two-minute chart can move the market 10-20 YM points, on a five-minute chart 30-50 points, and on a daily chart, several hundred points. The kicker, of course, is that the smaller the timeframe, the more frequent the signals. A two-minute chart may fire off three to five signals in a day, while the daily chart will fire off six to seven signals over the course of an entire year. Although I spend a large amount of my trading day focused on the E-mini S&Ps and the mini-sized Dow, there are also plenty of times when these indexes are dead in the water. On days when the indexes are trading in a range that is narrower than Paris Hilton's outlook on life, I look to the currencies and bonds for my next setup. My two favorite setups in the currencies are the squeeze play and what I call the box playa setup that comes up in a later chapter. For currencies, I execute these on the eight currency pairs I've already mentioned, and I prefer to do these in the forex markets. However, the EC on the CME also responds well to this setup. Let's take a look. TRADING RULES FOR BUYS (SELLS ARE REVERSED} 1. Set up a 24-hour chart so the overnight activity can be accounted for in this indi cator setup, 2. The heads up on this indicator is the first black dot. This is not a trade signal, but a heads up that a trade signal is setting up. This indicates when the Bollinger Bands are trading inside the Keltner Channels. 3. The signal on the indicator is the first gray dot after a series of black dots. This indicates that the Bollinger Bands have come back outside of the Keltner Channels. This is shown in detail in the charts that follow. 4. Once the first gray dot appears after a series of black dots, I go long if the histogram is above zero. Once the signal fires, I just place a market order. This is a momentum play, and 1 don't want to be messing around with limit orders that may not get filled. 5. For day trades, I place the following minimum money management stops. If the stop is also near a key price support level, I will take that into consideration and adjust accordingly. For example, if my entry is 1104.00 on the S&Ps and the daily pivot is at 110175,1 would move my stop to just below that pivot level to 1101.50, for a stop of 2.50 instead of 2.00.1 find that nine times out of ten, 1 just use the default stop. YM: 20 points ES: 2 points NQ: 4 points ER: 1.50 points EC: 20 ticks EURUSD; 20 pips US; 7 ricks Gold: 1.50 Stocks: 50 cents 6.For swing plays and position trades (taken off the daily charts), I place the following stops. I take into consideration the same key levels as discussed in item 4. YM: 150 points ES: 15 points NQ: 25 points ER: 8 points EC: 100 ticks EURUSD: 100 pips US: 35 ticks Gold: 10.00 Stocks: $2.50 7. My target is based purely on the momentum of the trade. Once the momentum index signal starts to weaken, I get out of the trade at the market. 8. I don't trail stops. Mini-Sized DowSeptember 2004 Contract August 18, 2004 1. Figure 10.1 shows how to set up the elements of this play in whatever timeframe a trader wishes to view. For intraday trading, [ like to watch the five-minute chart. The one- and two-minute charts are good for scalping, but these signals are not as power ful as the five-minute chart, though they are tradable. The Keltner Channel is the pair of thick black lines and is set at the default parameters of 20 and 1.5 on TradeStation. The Bollinger Bands are the thinner, gray lines and are set at the default settings of 20 and 2.0. At the bonom is a 12-period (on the close) momentum index oscillator. At point 1, the Bollinger Bands have gone inside the Keltner Channels. This indicates that the market is going into a quiet period, and it is a heads up. This is not a signaljust a heads up that when the Bollinger Bands pop back outs it will be time to take a trade. 2. Here the Bollinger Bands have come back outside the Keltner Channels. It is time to take a trade. 3. If the momentum index oscillator is above zero at this point, I go long. If it is below zero at this point, I go short, I don't mess around with limit orders. 1 just jump it at the market. This is just an example of what triggers the entry and exits. I look at specific plays in a moment. 1. One of the things my trading partner Hubert did was turn all the things in the first chart into an easy-to-read indicator, which is what I use (see Fig. 10.2). He devel oped this for both TradeStation and eSignal. When the fiollinger Bands go inside the Keltner Channels, the dots turn black. This is a heads up that the markets have entered a quiet period. 2. At this point the Bollinger Bands come back out of the Keltner Channels. 3. Since the momentum index oscillator is above zero, this is a long signal. 4* On the indicator, this is measured by when the dots turn back to gray after being black. When I see thai firsl gray dot, I know it is time to take a trade. If the histogram is above the zero line, 1 go long, and if it is below the zero line, I go short. Again, this is just to show you how the indicator works. In the next examples I go over some actual plays. I prefer to take off all the clutter'* that is on the price chart and just use the indicator But now you know how the indicator works. |
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