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.
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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
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
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
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
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