Traders Helping Traders E-zine for the week 3-4-2007 - Test Drive Edition

Part One - Erich's Trades

Reality check: I'm moving in 10 days. I think it's just beginning to sink in along with the moving anxiety attack. My wife's compiled a rather extensive list of "to-do's" that have to be "to-done" before the fateful day. On the one hand I'm looking forward to getting closer into town and in our new place. On the other hand I dread the thought of having to go through all our stuff and pack/unpack yet again.

While we've hired movers to handle all the difficult stuff there's still lot's to do. Sorting through all my stuff in the garage should take at least a day. I've got tools in there that I've long since forgotten about but I'm afraid to get rid of any of them because, you guessed it, as soon as I do that's when I'm going to need the darn thing.

I suppose there's a few items I could get rid of though. I've got at least two window spline tools: the one I originally bought and the other I bought when I couldn't find the first one. How much you want to bet that if I give one of them away I won't be able to find the other one and I'll end up having to replace the tool yet again. Maybe window splines get lonely and were meant to be in pairs?

Similarly I have a lot of duplicate wrenches. Problem is that all the duplicates are the sizes I never need. I've got four sets of wrenches in my tool box but only one 7/16, 1/2, 9/16 and 5/8ths wrench. Who ever needs a 13/16ths wrench anyway? If you know tell me as I've got a few looking for new homes.

Ditto for sockets, bladeless hacksaws, wounded sawhorses and seized clamps. They're all "tools" and in all honesty I hate to part with any of them. I suppose it's a "guy" thing and in spite of my best efforts I can't make my wife understand why I have to keep them.

Don't even get me going on the sports equipment. That's bound to take me another day to go through. I think I'd better get started!

Homework
Question:

Take a look at these two charts. One market is trending (or about to) and the other is not. Can you tell which one is which? How?

Answer:

Canola and Sugar are two markets in consolidation. Both charts show markets stuck between support and resistance; however if I had to choose one market as "ready" to trend it would be Canola. Why? Because Canola's DMI was looking stronger than Sugar's.

DMI is an indicator that attempts to quantify the strength of a trend. It usually does a good job of it too; unfortunately the indicator is quite lagging. Often a market is in a full (and obvious) trend before registering on DMI. In spite of this set back however, we can still get an idea which market is exhibiting the better trend. Since the trend is of paramount importance to our trades, DMI can be a useful filter for determining which markets we should watch and which should get moved to the back burner.

As it turns out, neither market moved into a trend last week. Canola's DMI became considerably weaker as prices rallied and Sugar exhibited signs of reversing and changing trend. But for us support and resistance traders this didn't really matter as we don't predict what prices will do next; rather we attempt to position ourselves to be on the right side of a trade if the market should do as we "expect". Given that Canola was trading at significant support and DMI was looking reasonably strong (to the downside) we could have planned to short Canola on a breakout through support.

Since support held and prices rallied is inconsequential. The important thing is that we were setting ourselves up to be in the right place at the right time. This is what experienced traders means when they say "don't chase markets". It is more important to pick your battles and being support and resistance traders that means finding the best support and resistance lines to trade off of. Of the two markets, Canola seemed to be showing the greatest promise for trending on a break of support which is why it would have been my choice of the two.

Erich

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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 Overview

The Australian Dollar wasn't too kind to us last week as the market made a quick breakout through resistance only to fall back on itself and head lower – a lot lower. That's what I get for flirting with the contract highs. In hindsight I was asking to get whipsawed. The only thing I regret is not taking advantage of the reversal. It's important to remember that a failed breach of resistance means that a reversal is likely. Since the market showed us we were wrong this was a high probability trade, but I was too wounded after the loss to take advantage of it. Next time.

We saw a couple of big moves in some of the other markets, and in spite of some choppy trading we might be seeing some trends develop for this week. We're currently still short our US Dollar trade, but we really need to see the market come around as rates continue to flirt with our exit stops.

British Pound

I'm not usually too enthralled with gapping markets but the British Pound gapped lower on Friday to familiar support at 194-ish. You'll recognize this as the support level that bounced the market higher a couple of week's ago, and in spite of the rally that followed the last time rates were here, the market seems to be rejecting higher rates and instead continues to challenge support.

The problem with the gap is that we might see some nasty ranges, and possibly a whipsaw as a result. The gap is only obvious on the day session as the combined session (day and night) would show one large bar to the downside. Regardless we know that we're trading off strong support right now, so a continuation lower "should" see rates continue to decline.

Even so I'll give the market a little room on the entry side and wait for a solid break of 194 before selling. Exit stops will go above Friday's high and the bottom of the gap. We know that gaps tend to highlight important support and resistance, so this should be strong resistance on a move lower. The first profit target is support at 191 but there could be a little static on the way at 191.30.

[Note: First Notice Day (FND) is March 19, so we should be able to get at least one week out of the trade before having to roll into the June contract. However if you're not comfortable trading this close to expiration you can already transfer this trade to June.]

SELL March British Pound at 193.83
Exit Order: 194.71
Approximate Risk Exposure: $550 per contract
Profit Target: 191.03
Approximate Potential Profit: $1750 per contract
RRR: 3:1
Degree of Risk: Moderate

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

For a detailed analysis of ALL the market sectors, 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 rest of the week - watch the blog.

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

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