Support and Resistance Trading
Simple Strategies for Short Funded Traders

Traders Helping Traders E-zine for the week 10-15-2006 - Test Drive Edition


Question: Do you ONLY cover one or two markets??

Answer: NO!! We cover all markets in all sectors - wherever there's a good trade, we'll cover it!

This is only the TEST DRIVE Edition. Our Subscribers get the whole thing.

For a detailed analysis of ALL the markets Erich and Tom cover along with explicit charts, entries, exits, stops, risk/reward ratio, potential profit, (and much more) please join us at http://www.supportandresistance.com/subscribe.html

 

Part One - Erich's Trades

Lesson du Jour

Question:
How do you arrive at your profit targets?

Answer:
Profit targets are nothing more than subjective targets that the market might stop at. I arrive at these targets using the following tools:

If the market is retracing:

  1. Fib levels, especially the 50% and 62%, but on larger trends, or long term charts the 38% will sometimes be influential
     
  2. Trendlines, if the market is retracing to a trendline I will assume that the resistance near the trendline will cause the market to react (especially if it's in the direction of the major trend and not the pullback trend)
     
  3. 20 day moving average, which is a "moving" trendline.
     
  4. The neckline (or full retracement) of the previous move. The reason rounded top/bottom formations are so powerful is that they repeat over and over again. I almost always assume a full retracement past the 62% line, but given the size of the move it might be a very long term target and I'll have shorter term targets in the meantime.

It is IMPORTANT TO NOTE that these tools only help me narrow my search for important support and resistance levels. I do not trade the numbers these tools offer up blindly, but they are helpful for narrowing your focus.

In a trending market:

1. If the trend is strong (ie. DMI is strong or building) I will often opt for trailing a stop. This usually allows me the greatest flexibility in capturing the better part of the move, but will routinely leave a lot more money at risk. October Sugar is a perfect example where we racked up over $2300 in profit per contract before finally getting stopped out, but I was running a stop almost $400 – 500 back, and that's a lot for sugar, but was necessary to "ride" the trend.

2. If the trend is weak I will almost always opt for a profit target. This is any area where the S&R is strong, which is determined by the tools in the manual you got. Essentially it's any area of extreme population, especially if there has been a previous reaction in that area as well.

You might want to consider the size of your account as well. I almost always recommend that small account traders take profit on target when they get it. Sometimes the market will move well past your intended target, but other times it will reverse. More often than not you'll be better served taking profit on target, and when in doubt, that's what you should do.

Remember that it's not the size of the profit that's important; rather it's the consistency in getting the profit. Once you have the consistency part down, the larger profits come from taking more contracts, not making home run trades.

Does that help?

Got a question that needs answering like an itch you can't scratch? Send it along to me at Erich@tradershelpingtraders.net and I'll be happy to try and clear things up for you.
 

A Sampling of the Markets we're covering this week...


Currencies Market Overview

This last week saw some of the currency markets in a bit of a transition. This is rare because the currencies are normally really good trending markets, so once they settle on a direction we can usually expect them to stay on course for a while, but this was not the case.

The biggest reversal out of trend came in the Mexican Peso which we were looking to short below support. The Aussie Dollar also did an about face, but seems to have stalled again, not knowing if it's safe to rally or not.

The EuroFX, Swiss Franc and US Dollar Index were all ranging too wildly to consider trading this week, but the British Pound, which normally follows these markets closely, has made a tighter, more tradable range. The Canadian Dollar is our only open trade that we carried into the weekend, and it still looks promising for the most part. Best of all if you missed the earlier move you might have another chance to get into the trade.

British Pound

The Pound spent the better part of last week hammering away at the 185.30-ish support zone. Friday's session finally saw the market fill the gap that started the week, while once again making a run at support. With such a well defined support area we have a clear line from where to sell the market this week.

DMI shows the market in a good downtrend; however RSI is showing that things are a touch oversold. While this doesn't mean that the Pound will automatically find support, it does make me a touch nervous about selling. I would have felt better if we saw a bigger pullback move, as that would have "normalized" RSI a bit as well, but we might not get it.

We'll have to park a sell order below current support in case we see rates fall off on Monday. Exit stops will go above the intermediate resistance at 186.00, which is tight, but it does help keep risk to a reasonable level. The first profit target is monthly support at 182.50. Coincidentally it is also near the 50% retracement level on the daily chart.

SELL December British Pound at 185.27
Exit Order: 186.03
Approximate Risk Exposure: $475 per contract
Profit Target: 182.57
Approximate Potential Profit: $1687 per contract
RRR: 3 1/2:1
Degree of Risk: Moderate to HIGH

British Pound Chart

Canadian Dollar

Our Canadian Dollar short is off to a good start, although rates promptly stalled after breaking support last Tuesday. From here the market channelled for the remainder of the week, giving us an opportunity to tighten our stops as well as setting up to add to our existing position, or enter the market if you didn't catch the earlier move.

It is a basic narrow channel formation, which could be bracketed to take the trade on either side; however my own personal preference would be to sell with the trend. Right now I think I'd still be a touch suspicious of any rally attempts, but the support at 8800 is nothing to sneeze at either.

If we do get stopped out we'll still walk with a bit of profit as I've rolled my stops above the 8830 resistance – the top end of the narrow channel. If rates do rally, we should have another chance to short the market, probably off the 8875 resistance, but that's speculating too far into the future for right now. Right now we want to concentrate on managing the trade we have.

CONTINUATION of Short December Canadian Dollar from 8863
Exit Order: 8833
Approximate Risk Exposure: $0 per contract
Profit Target: 8703
Approximate Potential Profit: $1600 per contract
RRR: n/a
Degree of Risk: Moderate

Canadian Dollar Chart

The charts in this publication are all made using Gecko's Track 'n Trade charting software. You can get a demo for free here.

Energies Market Overview

The Energy complex has remained rather passive the last week or so. After a big decline a few weeks earlier it seems that the market has put on the brakes as it decides what to do next. I thought that we'd see a bigger pullback, but it hasn't materialized – yet. I also thought that last week's run lower Wednesday might be the resumption of the downtrend, so we sold it, but it quickly died off and now we're back above support.

The downtrend is still in good shape and will probably continue for the longer term. RSI is fairly neutral, which is also a good sign for the current trend. In spite of these conditions however, prices continue to honour the support at/near the low. I thought about shorting the market(s) on Monday, as that is usually a good opportunity to get into the big ranging markets; however until we see something trade closer to the proven support level I'm going to stay cautious.

Mini – Natural Gas

A good start to our first mini-Natural Gas trade last week as we sold the market after it showed us resistance at 8.21. How did I know the market showed me resistance? Because it traded lower the next day, that's how.

When you're trading a mini contract it is important to take your cues from the larger contract. Looking at the mini-NG you'd never really get a feel for what is happening in the market; however when you look at the full sized contract you can easily see that the market is in a rather large, long term decline. This is not (or was not) as easy to see on the mini contract chart.

Now that the market is underway, we might be in for a bit of a run as DMI continues to look strong and might even be picking up steam. If you tightened your stops above the intraday resistance at 7.50 for Friday, then you're already flat; however if you're still in the trade you might consider bringing stops in above Friday's high for Monday.

The "ideal" stop is still above Thursday's high, but with over $1000 in profit as of the close, that might be a touch too much risk to hold.

CONTINUATION of Short December mini-Natural Gas from 7.79
Exit Order: 7.55
Approximate Risk Exposure: $0 per contract
Profit Target: 7.03
Approximate Potential Profit: $1900 per contract
RRR: n/a
Degree of Risk: Moderate

Natural Gas Chart

The charts in this publication are all made using Gecko's Track 'n Trade charting software. You can get a demo for free here. The rest of the Markets in all sectors are covered in the Subscriber Edition.

This is only a small sample of the markets we cover!

For a detailed analysis of ALL of the markets, with explicit charts, entries, exits, stops, risk/reward ratio, potential profit, (and much more) please join us at http://www.supportandresistance.com/subscribe.html

If you have any questions at all about any of these chart lessons, please feel free to ask at the futures trading forum or click here to email us. You can also chat with Erich and Tom live every Wednesday evening at 9:30pm eastern in the HotComm webinar room. Click the link for details about the Support and Resistance Trading Webinars.

Erich's Updates for Tuesday - watch the blog:
To Follow

Tom's Updates for Tuesday - watch the blog:
To Follow

Erich's Updates for Wednesday - watch the blog:
To Follow

Tom's Updates for Wednesday - watch the blog:
To Follow

Erich's Updates for Thursday - watch the blog:
To Follow

Tom's Update for Thursday - watch the blog:
To Follow

Erich's Update for Friday - watch the blog:
To Follow.

Tom's Update for Friday - watch the blog:
To Follow.

For a detailed analysis of ALL of the markets, with explicit charts, entries, exits, stops, risk/reward ratio, potential profit, (and much more) please join us at http://www.supportandresistance.com/subscribe.html

Take care, and good trades to you for the coming week!

The charts in this publication are all made using Gecko's Track 'n Trade charting software. You can get a demo for free here.
 

The Scorecard

The purpose of this section is to give you a feel for which markets might be worth trading and which you might pass on given your own set of circumstances. The figures quoted are based on the price levels outlined in the ezine, trading single contracts and do not accurately account for slippage, commissions or other trading related fees. The Score Card is updated monthly.

Summary for the Month of September 2006

Date Pos. Market In Out Profit/Loss
September 5 – 15 Sell November Unleaded Gas 172.85 162.05 4236 profit
September 5 – 18 Sell November Heating Oil 199.95 179.15 8736 profit
September 5 – 18 Sell November Crude 6975 6435 5400 profit
September 5 – 7 Sell December Corn 243 ¾ 243 ¾ 0
September 6 – 8 Sell December Bean Oil 2497 2513 96 loss
September 6 Sell December Cocoa 1483 1501 180 loss
September 6 – 11 Sell December Swiss Franc 8163 8129 425 profit
September 11 – 15 Sell December Soy Meal 159.9 162.7 280 loss
September 11 Buy December mini-Dow 11507 11427 400 loss
September 11 – 18 Sell December Corn 243 ¾ 244 12 loss
September 12 – 14 Buy December mini-Dow 11507 11593 430 profit
September 12 – 13 Buy October Lean Hogs 6770 6657 450 loss
September 15 – 18 Sell December EuroFX 127.17 127.67 625 loss
September 15 – 19 Buy Dec. US Dollar Index 8571 8533 380 loss
September 15 – 20 Sell March Eurodollar 94.675 94.735 150 loss
September 18 – 19 Sell December Japanese Yen 8569 8615 575 loss
September 19 – 26 Sell December Mexican Peso 90.975 90.325 325 profit
September 19 – 22 Sell November Heating Oil 156.85 154.05 1176 profit
September 20 – 25 Sell October Live Cattle 8947 8052 420 loss
Sept. 22 – Oct. 3 Sell Dec. Australian Dollar 7493 7457 360 profit
September 25 – 28 Buy December mini-Dow 11653 11741 440 profit
Sept. 26 – Oct. 3 Sell December Japanese Yen 8647 8577 875 profit
September 26 – 27 Buy December Corn 258 ¼ 254 ¼ 200 loss
Sept. 26 – Oct. 3 Buy December Wheat 424 ¼ 456 1587 profit
Sept. 29 – Oct. 4 Sell December Live Cattle 8932 9040 430 loss
  Gross Profit: $23,990 per contract Gross Loss: $4198 per contract


Net Profit per contract: $19,792
 before commissions and fees!
 

* NOTE!!! Trading commodities is RISKY!!!! These figures are estimates in the interests of tracking the trades. Erich may or may not have a real money position in any market covered at any given time. This Score Card does NOT apply to Tom's Trades. This is neither a solicitation to trade nor a recommendation of any strategy. Always consult your broker or advisor before attempting any trade. Commodity trading involves substantial risk of loss. See full disclaimers at the bottom of this email.


 

Homework

None this week
 
 

 
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Futures Trading is Risky! Never trade with money you cannot afford to lose!


Nothing in this publication is either a solicitation to trade or a recommendation of any strategy. Always consult your broker or advisor before attempting any trade. Commodity trading involves substantial risk of loss.

THE DATA CONTAINED HERE IN ARE BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY OR COMPLETENESS; AND AS SUCH ARE SUBJECT TO CHANGE WITHOUT NOTICE. TRADERS HELPING TRADERS AND IT'S ASSOCIATES WILL NOT BE RESPONSIBLE FOR ANYTHING WHICH MAY RESULT FROM RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HEREIN.

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HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
 

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