Support and Resistance Trading
Simple Strategies for Short Funded Traders

Traders Helping Traders E-zine for the week 9-17-2006 - 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

"Rule One: In a losing game such as trading, we shall…assume we are wrong until proven correct! (We do not assume we are correct until proven wrong.) Positions established must be reduced and removed until, or unless, the market proves the position correct! (We allow the market to verify correct positions.)"

- Phantom of the Pits.

The Phantom of the Pits is a mysterious, knowledgeable trader who many years ago shared his trading philosophy in the form of an on-line book/interview (http://www.ctcn.com/phantom/forward.htm). While much of the book/interview is esoteric in nature, he does lay the foundation for becoming a successful trader (although he doesn't give you too many specifics of how to do it). In a nutshell Rule One gives traders the key to executing a successful trading strategy, namely: make the market prove you right before getting in and get out quickly if you're wrong.

Many new traders are under the impression that in order to be a good trader you need to be good at choosing the future market direction. While this is true to an extent it is not as important as structuring your trade in such a way as to let the market tell you which way it wants to go. I like to think of initiating trades as setting up scenarios for the market to fulfill. If the scenario is completed then I am in the trade, if it is not, then I stand aside or exit if I'm already in.

A simple way to make the market prove you right is to use stop orders instead of market orders. A market order will automatically fill you at whatever level the market is currently trading at; whereas a stop order will fill only when the market reaches or exceeds a certain price pre-determined by you. The advantage to using a stop order is that you are making the market prove that it indeed wants to go (or continue to go) the direction you want it to go, verses purchasing a market order and hoping the market will go in the direction you want it to go!

For example if you wanted to go long in a market you could simply purchase a market order at the current price and hope the market will continue long, or conversely, you could place a stop order above the current range to make the market prove it is going in the planned direction before you are filled. Where you want to place the entry order depends on the trading system you are using, but the simple fact of making the market prove its intentions will keep you out of trades that could be going against you.

The most obvious example of this type of trade is the sideways channel formation where you enter either long or short depending on which side of the channel the market breaks out. With a little thought however, you will see how this rule can be used in almost any trading situation.

For instance, you might be looking at a market that only has a good risk/reward potential to one side, in this example let's say it is the short side. Rather than just purchasing a short contract at the market and hoping that prices will fall, you can place an order to enter short ONLY if prices begin moving in the right direction and exceed a predetermined level before entering the market.

This way if prices go against you and move up instead, you suffer no loss since you are not in the market yet: the market did not prove you correct. Besides, you did not see a good risk/reward potential to the upside which is why you established a trading scenario to the short side. If the market does move down and complete your scenario then, and only then, are you in the market and hopefully making profits according to your trading plan.

While this is a very simplified version of a trading plan you can begin to see how important it is to make the market prove you right before you take the big step of getting involved in the market.

Erich

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

The Currency complex is slowly showing signs of coming around. While many of the markets are still between trends, they are nearing important support and resistance levels and therefore are offering us some interesting trading opportunities this week. These opportunities are not without their challenges however; as many of the current signals are not as solid as we normally like to see. The problem is that if we don't take advantage of the markets now, we might not get a second chance if they continue on their current course.

Australian Dollar

The Australian Dollar is characteristic of many of the currency markets this week. We have a market that has been in an uptrend; however now it seems to be struggling with the trend and might be prepared to head lower. The market is also against considerable daily and weekly support, which is highlighted by the bullish trendline. Did you also notice that the recent reaction came at the 38% retracement line? Coincidence? I don't think so.

Unlike some of the other currency markets however, the Aussie buck has a trend – well, at least according to DMI. Rates are also trading well below the 20 day moving average, which confirms our selling bias for this market which is currently to the downside. While we might see long term support hold the market up, we have a well defined support area from which to sell. What S&R trader could ask for more?

Wednesday's reactionary day clearly shows us the sensitivity at the 7485 – 7490-ish area. I would argue that this is actually a reaction to the 7500 support, but that's not really important right now. What is important is that a break through Wednesday's low should see the market continue lower, and therefore that is our sell signal.

I'm going to place exit stops above the 7500 resistance; however you could opt for the 7520 area instead. Using the further stop will necessitate using the support at the 62% retracement as a profit target; whereas using the tighter stop means we can consider the support near the 50% level as our first target.

SELL December Australian Dollar at 7477
Exit Order: 7503
Approximate Risk Exposure: $260 per contract
Profit Target: 7393
Approximate Potential Profit: $840 per contract
RRR: 3:1
Degree of Risk: Moderate

Australian Dollar Chart

The rest of the currencies are covered in the Subscriber Edition.

Energies Market Overview

The Energy complex offered up three home run trades the last couple of weeks for us. It is rare when it happens, but when it does happen it really can make your month! Getting on board a quickly moving market with ranges as large as the energies make, is mostly skill with a bit of luck tossed into the mix. Fortunately for us futures traders these "once in a lifetime" trades have a tendency to occur every two or three months or so.

Unleaded Gas

Our ride on the Unleaded freight train came to an end on Friday when the market traded high enough to find our stops. We did pretty well in this market considering the wild ranges that it is capable of. Fortunately we were in a very strong downtrend, so prices never had much of a chance to rally.

That might all change this week however, as prices are firmly against long term support at 155. The current support is just an early reaction to the long term support, which seems to have slowed the decline and might even cause a bounce for the short term.

While a short term pullback could definitely be a profitable trade in this market, I'll continue to concentrate on selling with the trend. The obvious plan is to short the market below the support at 157-ish where prices bottomed out last week. If prices do rally, we can adjust our entry accordingly, but right now, our best bet for getting into this trade cleanly, is to sell it on a break through support to start the week.

Exit stops should go above the 161 resistance; however that's going to put far too much money at risk. I'll go with the stops above the 159 line, which will still leave over $900 on the table, and it makes the trade quite tight, but that's all I'm prepared to risk on this market right now.

Next profit target is long term support at 140 – 141, which also coincides with the 62% retracement level. Depending on how big of a bounce we get off current support, we can almost be guaranteed a reaction off 141.

SELL November Unleaded Gas at 156.85
Exit Order: 159.05
Approximate Risk Exposure: $924 per contract
Profit Target: 141.55
Approximate Potential Profit: $6426 per contract
RRR: 6 1/2:1
Degree of Risk: HIGH

Unleaded Gas chart

The rest of the Energies Markets are covered in the Subscriber Edition.

Financials/Indices Market Overview

The Financial and Index markets also seem to have finally settled in on a direction. The Eurodollar looks like it is ready to resume the long term downtrend after pulling back for the last few weeks. The market continued to battle the heavy resistance near 94.700 (March 2007), which is also near the 38% retracement level, before succumbing this week.

While the ED is falling, the Index markets continue to be strong. We were unable to ride the Dow rally into the weekend, but even so the market offered us a decent profit when we got stopped on Thursday. Now that the trend seems to be holding we need to be on the lookout for resistance and another opportunity to get long. And with RSI rather overbought I don't think we will have to wait too long.

The rest of the Financial Markets are covered in the Subscriber Edition.

Grains Market Overview

The Grain complex might have thrown us a knuckle ball last week. For all intent and purposes it looked as through grain prices (in general) were going to slide. The markets in the midst of harvest and there was no reason to think that prices were going anywhere but down – until this week when we saw them form support and trade higher again!

I'm not convinced that the rally will be sustained and it might be a short term push by the bulls to see if they can muster a rally. Overall grain prices should continue to come down, at least for the longer term, in spite of the markets already trading near some pretty heft long term support lines.

Corn

Our Corn trade was looking so promising last week, until Friday that is when the market mounted a major rally. RSI also hooked higher, which is a bad sign and one that is likely to see prices push higher still. There is still hope for the bears however. Prices are still trading below the 20 day moving average and trendline resistance at 245. As such the current rally might be short lived as prices run into resistance.

Then again, they might not. DMI is still weak, which was a major problem with selling this market. It hasn't shifted to the upside (yet) but it isn't gaining to the downside either. The official change in trend won't come until the market is trading above 250, but seasonally speaking prices should only be going down. Now if we're only able to ride out the reaction.

CONTINUATION of Short December Corn from 243 3/4
Exit Order: 243 3/4
Approximate Risk Exposure: $0 per contract
Profit Target: 211 1/4
Approximate Potential Profit: $1625 per contract
RRR: n/a
Degree of Risk: Moderate to HIGH

Corn chart

The rest of the Energies Markets are covered in the Subscriber Edition.

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

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 July 2006

Date Pos. Market In Out Profit/Loss
July 3 – 6 Buy August Feeder Cattle 115.75  116.15  187 profit
July 5 – 6 Buy August Heating Oil 207 .10 204.95 903 loss
July 5 – 7 Buy August Crude 75.20 75.75 550 profit
July 5 – 7 Buy September OJ 169.65 170.70 157 profit
July 7 – 11 Sell December Cotton 5285 5250 175 profit
July 13 – 18 Sell September EuroFX 127.27 126.11 1450 profit
July 13 – 17 Buy September Unleaded 227.05 230.70 1533 profit
July 13 – 17 Buy September Crude 7710 7815 1050 profit
July 13 – 17 Buy August Feeder Cattle 114.52 113.70 412 loss
July 14 – 10 Buy September Rice 946.5 939.5 140 loss
July 14 – 17 Buy September Cocoa 1707 1690 170 loss
July 17 – 24 Sell September Soy Meal 172.3 169.5 280 profit
July 17 Buy September Wheat 402 Ό 395 Ύ 325 loss
July 18 – 21 Buy September Mexican Peso 91.025 91.500 237 profit
July 18 – 19 Sell March Eurodollar 94.415 94.460 112 loss
July 18 Sell September mini-NAS 1459.5 1475.5 340 loss
July 19 – 24 Buy August Feeder Cattle 114.52 114.00 262 loss
July 20 – Aug 1 Buy September Aus Dollar 7527 7616 890 profit
July 21 – 24 Sell September mini-S&P 1249.50 1255.50 300 loss
July 25 – 26 Sell September Japanese Yen 8607 8653 575 loss
July 26 – 31 Sell September Corn 237 Ό 240 Ό 150 loss
July 27 – 28 Buy September Heating Oil 206.05 204.95 462 loss
July 27 – Aug 2 Sell September Soy Meal 168.3 165.7 260 profit
July 31 – Aug 10 Buy September British Pound 187.03 190.47 2150 profit
July 31 – August 1 Sell September US $ Index 8497 8523 260 loss
  Gross Profit: $8750 per contract Gross Loss: $4411 per contract


Net Profit per contract: $4339
 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

In the Subcriber Edition.
 
 

 
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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.

DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD BE USED. FUTURES AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN A FUTURES POSITION.

NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

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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