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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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I'm not looking for any specific candlestick patterns such as Dojis, Hammers Shooting Stars, and so forth1. On this three-minute chart of the mini-sized Dow on March 3, 2005, a long rever sal signal fired right around 1:00 p.m. Eastern, as the third brick back in the series was penetrated (see Fig. \ 1.2). The entry on a buy stop order was 10817. 2. For the exkt we are now wailing for a down (black) brick to form, and once that happens, we will use a trailing three-brick stop utilizing the up bricks. By doing this, the trade is exited al 10871, for a gain of +54 points. Mini-Sized DowMarch 2005 Contract March 9F 2005 1. On March 9, 2005, this five-minute chart of the YM fired off a brick short just before noon Eastern (see Fig. 11.3). The entry took place using a sell stop order 2. For the exit, the goal is to wait for an up brick, and once that occurs, to trail a stop three bricks back. The slop is hit at IO83O for a gain of+86 points. What I like about this is that the setup keeps a persun in the trade all through the choppy noi^ie and false rallies that occur between 1:00 p.m. and 3:00 p.m. Eastern. This goes back to the importance of having a specific exit strategy-and only a specific exit strategyto get out of a trade. 2. The play continued to work lower until the last hour of trade, generating an exit signal at 10806 for a gain of +58 points. Again I would like to point out all the noise in this chart that occurred between 11:30 am, arid nearly 2:00p.m. How many traders got chopped up in this? How many chased it higher? How many shorts panicked and covered? A trader who follows a specific setup, with a specific set of parameters, is at a huge advantage over all the people out there who are trying to rely on their judgment while in a trade. Mini-Sized DowMarch 2005 Contract, March 16, 2005 1. On this two-minute chart of the YM on March 16, 2005, a reversal short brick sig nal fired off at 10699 in the latter part of the trading day a little after 1:00 p.m. 2. The markets continued to sell off, and the bricks stayed in sell mode until about 20 minutes before the close, when a reversal signal hit, stopping the trade out at 10657 for a gain of +42 points. Mini-Sized DowMarch 2005 Contract March 22, 2005 1. On this two-minute chart of the YM on March 22, 2005, the YM fired off a short signal late in the trading day, and a sell stop order was hit at 10622 2, The markets drifted lower into the close, and there was actually not a reversal signal given to exit this trade- In this case, we just use the 4:15 p.m. Eastern close on the ES to get out of the trade. Although the YM continues to trade until 5:00 p.m., the liquidity really dries up after the ES maiket closes. In (his case, exiting on the close generated an exit at 10469 for a gain of +153 points. Why the big sell off? This was FOMC (Federal Open Market Committee) day, and the markets sold off after the news hit about another quarter-point rate increase. This ties into one of my biggest beliefs about trading the marketseconomic reports mean very little in the scheme of things. The market is going to do what the market is going to do. The key is to focus on the setup and ignore the rest of the noise. Mini-Sized DowDecember 2004 Contract, October 27, 2004 1. On this daily chart of the YM, a swing play was generated on the bricks near the end of October 2004 (see Fig. 11.8). The entry on this play was 9927. 2* The daily bricks stayed in buy mode until the end of November when a sell signal was generated at 10575, for a gain of +648 points. When the market reversed in late October there were a lot of bears. This again points to the fact that it doesn't really matter what people think about the market and what they feel it might do. What matters is what the market is actually doing. Trade setups like the bricks remove all the emotion. SUMMING UP THE BRICKS The brick setup is great when you're trying to catch an intraday reversal. Too many traders try to do this but end up getting burned. They short the market, and it just keeps going higher. Or they buy the market, and it gets flattened. There is no reason to try to catch the exact high or the exact low in a market move. That involves too much risk and has a low probability of success. With this confirmation signal, a trader will be made aware of when the move has petered out and has started its reversal, and although they won't be able to catch the exact highs or the exact lows, they will still be able to catch the meat of the move. THE PING-PONG PLAY: BATTING THE MARKETS BACK AND FORTH ... ALL DAY LONG A TRADING CHANNEL THAT MOVES AND ADAPTS TO THE MARKETS IN REAL TIME The Ping-Pong play is a channel play with a twist: This channel is always present and is continually adjusting itself to the market action. There isn't any need to draw a couple of parallel lines and wait for two tests of the highs and two tests of the lows to confirm that a channel is in place. This channel is always hanging around, waiting for a trade to setup. This setup was discovered by accident by Hubert Senters, one of my trading partners. He spent u couple of years watching KLAC (KLA Tencor Corp) on a two-minute chart and a five-minute chart. He noticed that when KLAC broke up through the 200 simple moving average (SMA) on a two-minute chan, it would head right up to the 200-period SMA on a five-minute chan. To make life easier, he eventually Figured out that he could do this all on one chart, by setting up a new two-minute chart that had both a 200 SMA and a 500 SMA. The 500 SMA on a two-minute chart plots just the same as a 200 period SMA on a five-minute chart. Once this play was converted to one chart, it was easy to see that a live, moving channel was in place as the 200 SMA and 500 SMA moved together in an almost graceful dance. Hubert uses this setup almost exclusively on the stock KLAC. WeVe also found that it works well for other high-volatility, high-volume stocks that tend to attract a lot of the day-trading crowd. TRADING RULES FOR BUYS (SELLS ARE REVERSED) The Ping-Pong play can be both a momentum play and a fade play, depending on the initial move against one of the moving averages. When prices are trading inside the channel, this is a fade play. When prices break into the channel, this turns into a momentum play. 1. 1 set up a two-minute chart on a 24-hour time setting. I want the pre- and postmar- ket activity to be taken into account for the moving average calculations. 2. I like to use candlestick price charts on (his play, but it is not critical because I'm not looking for any specific candlestick patterns such as Dojis, Hammers, Shooting Stars, and so forth. If you are unfamiliar with candlestick patterns, an excellent book is Japanese Candlestick Charting by Steve Nison. I personally don't use candlestick patterns for intraday trading, but I do like to see what the daily candlestick bars are doing to get a better feel of who is in control of the marketbuyers or sellers. 3. 1 place a 200-period SMA (represented by the thick line in the chart examples) and a 500-period SMA (represented by the thin line in the chart examples) on the two-minute chart. 4. When the market is trading below both moving averages, I go long after the first two-minute bar closes inside the moving average channel. 5. When the market is trading inside the moving averages, I go long on a bounce oft the bottom of the channel. I will wait for a two-minute bar to close on a bounce off the channel before placing a market order to go long. 6. I use a 5O-cent stop- If the moving averages are trading wider than 50 cents, then when I am up 50 cents on the trade, I will move my stop to the moving average that triggered my entry. If the moving averages are trading narrower than 50 cents, then I will leave my original stop in place, and I won't trail it. 7. My target is the other moving average. 8. I typically use this trade on KLAC, as does Hubert. However, it works with other volatile stocks as well. KLAC (KLA Tencor Corp), October 4, 2004 1. On October 4, 2004, KLAC broke down through the 200 SMA (see Fig. 12.1). After the first closing candlestick, 1 went short at the market and was filled at 43.83. I place a 50-cent stop at 44.33, and my target is the 500 SMA below. About 45 minutes later I am up 50 cents on the trade, so I move my Mop down to the 200 SMA, which is trading at 43.9 L 2. KLAC rallies and comes within 10 cents of my stop. It eventually rolls over and hits my target at 43.11 at point 2, and I am out of the trade for a gain of 72 cents. KLAC is liquid and will support a large number of shares on this trade. For 1,000 shares that is a profit of $720; for 10,000 shares that is a gain of $7,200. There will be a lit tie slippage when going in and out of 10,000 shares at the market. When this happens T just take the average price, and 1 use that to determine where I will place my 50-cent stop. I will also trade KLAC single stock futures on this trade (KLAC IC), For those of you who aren't familiar with single stock futures, they are nice because the leverage is 5 to 1 without any maigin interest costs. And these can be traded in an IRA through a trust account (meaning you can short in your IRA), and you can do these day trades with only a few thousand dollars in your account, instead of the S25000 minimum you need to day trade stocks. One single stock futures (SSF) contract represents 100 shares of stock. With single stock futures, I will use limit orders instead of market orders because they are not as liquid as the underlying stock. However, the low volume that is currently present in SSFs is misleading. The liquidity is based more on the volume of the underlying stock. This is something I talk more about later in the 8/21 EMAs for Swings chapter. My experience with single stock futures has been very positive, and I continue to add more of these contracts to my trading program. 1. On September 23, 2004, KLAC pushes up through its 200 SMA. After the first two-minute bar closes above this level, I take a long at the market, and I'm filled at 40.76.1 place a 50-cent stop at 40.26. My target is the 500 period moving average trading overhead. For this panicular trade, the moving averages are not 50 cents apart, so I won't be trailing my stop. 2. KLAC edges higher, and my target in the form of the 500 SMA is hit, and I'm out at 41.07 for a gain of 31 cents. KLAC (KLA Tencor Corp), August 30,2004 1,On August 30, 2004, KLAC rallies into the 200 SMA (see Fig. 12.3). When the first bar closes back below this moving average, I go short at the market. I'm filled at 38,24, and I place a 50-cent stop at 38.74, The moving averages are less than 50 cents apart, so I won't be trailing my stop on this trade. 2.KLAC goes pretty much straight down, and a little over 40 minutes later I am out of my short at the 500 SMA. I'm filled at 37.S2 for a gain of 42 cents. KLAC (KLA Tencor Corp), August 25, 2004 1. On August 25, 2004, KLAC comes down and tests the 200 SMA while trading inside this moving average channel (see Fig. 12.4). Once the first two-minute bar closes above the 200 SMA after the test, I go long at the market. I'm Filled at 37.10, and I place a 50-cent stop at 36.60. The moving averages in this case are less than 50 cents apart, so I won't be trailing any stops on this trade. 2. KLAC rallies to the 500 SMA, and I'm out at 37.58 for a gain of 48 cents. This is scalping at its finest, and although these aren't huge plays, some would aigue that it beats flipping burgers for a living. 1.On August 23, KLAC sells off and breaks hard through the 200 SMA. It closes pretty deep within the channel, but as soon as this first bar closes, I go short, I'm filled at 37.94.1 place a 50-cent stop at 38.44. The 500 SMA is not very far away, so I won't have the opportunity to trail my stop at all. 2.It takes longer than I thought it would, but the 500 SMA is eventually hit, and I'm out at 37.61 for a gain of 33 cents. 1. On August 19, 2004, KLAC slams through the 200 SMA (see Fig. 12.6). Once the first bar through closes below this level, I go short at the market. I'm filled at an average price of 37.44. I place a 50-cent stop at 37,94. The two moving averages are less than 50 cents apart, so there won't be any trailing on this trade. 2T The market chops around for a while, and KLAC doesn't so much fall to its 500 SMA as the 500 SMA rallies to the current price levels. Once this happens, I ge( out at the market. I'm filled at 37.15 for a gain of 29 cents. This is a good example of the living, breathing, moving, horizontal channels in action. There are no stationary straight lines on these setups. These babies move and ebb and flow with the market. KLAC [KLA Tencor Corp), August 17,2004 1. On August 17, 2004, KLAC gaps down into the 500 SMA (see Fig. 12.7), Once I see a two-minute candlestick that closes back above the 500 SMA, (the third candlestick over from point 1), I go long at the market and am filled at 36,32. Once again, the two moving averages are less than 50 cents apart, so I won't be trailing any stops. 2- KLAC pushes higher quickly, and eight minutes later I'm out at 36,76 for a gain of 44 cents. 1. On August 10, 2004, KLAC sells off and hits the bottom of its 200. KLAC pushes through this level, and I'm poised to go long after the first two-minute bar closes back inside the channel. This takes place shortly thereafter, and I go long at the market. My fill is 38,53. Once again the moving averages are less than 50 cents apart, no 1 won't have to worry about trailing my stop. 2. KLAC grinds higher, and after a while the 500 SMA is touched. When this happens, I exit and take my profits at 38.80 for a gain of 27 cents. It is okay to place limit orders for targets, but because the two-minute charts move fast, the price of the moving average is going to fluctuate and change every couple of bars, so you have to keep an eye on it, or have the exits adjust automatically via a trading system. 1.On July 21, 2004, KLAC drops back into its channel through the 200 SMA. and I short once the first bar closes within the channel (see Fig. 12.9). I'm filled at 41.23, and I place a 50-cent stop. I do a quick check and see that the moving averages are less than 50 cents apart, and that of course means I won't be trailing any stops. 2.KLAC drifts down, and the 500 SMA is tagged. I cover at 40.81 and I'm out for a gain of 42 cents. KLAC (KLA Tencor Corp), July 12, 2004 L On July 12, 2004, KLAC pushes back up into its channel via the 200 SMA {see Fig. 12.10). Once the fim two-minute bar closes inside this channel, I go long, and I'm filled at 44.39. I place a 50-cent stop at 43.89. 1 duly note that the moving averages are greater than 50 cents apart. So, if I get to the point where I'm up 50 cents on this trade, I will move my stop up to the 200 SMA. 2. KLAC pushes higher, and once it trades through 44.89, I move up my stop to the 200 SMA, which is at 44.23, KLAC continues to rally straight up, and it runs right into the 500 SMA. When this happens, I close out my long at the market. Tm filled at 45,23 for a gain of 84 cents, KLAC [KLA Tencor Corp), July 1,2004 1. On July 1, 2004, KLAC gaps down and hits its 200 SMA (see Fig. 12J1). Once it closes through this level, I go short, and I'm filled at 49.01.1 immediately place a stop 50 cents away at 49.51. The moving averages are greater than 50 cents apart, so I will look to trail my stop down to the 200 SMA once I'm up 50 cents in the trade. KLAC ends up selling off quickly, and once it trades through 48.51,1 move my stop down to 48.99, which is where the 200 SMA is trading at this time. 2. KLAC continues to sell off, and once it touches the 500 SMA, I start to cover, and I'm out at 48-44 for a gain of 57 cents. KLAC (KLA Tencor Corp), May 19, 2004 1. On May 19, 2004, KLAC sells off and enters its moving average channel (see Fig. 12.12). I go short when the first two-minute bar closes inside this channel. I'm filled at 45.78, and I place a 50-cent stop at 46,28. Since the moving averages are wider than 50 cents apart, I will be looking to trail my stop once I'm up 50 cents. KLAC drifts down, and once price action falls through 45.28,1 move my stop down to 45.89 2. KLAC continues to sell off, and once it hits the 500 SMAt I'm out at 44.94 for a gain of 84 cents. WHEW YOU'RE DANCING WITH THE MARKET, IT'S A GOOD IDEA TO LET IT LEAD One of the things I like about this play is that it catches the ebbs and flows of the market nicely. All 1 have to do is sit back and let the market lead There really isn't any good time to try to force the market to do what you want it to do. This setup is a nice reminder of that, and all I have to do is sit back, relax, and follow my dance partner |
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