Monday, October 16, 2006

Traders Helping Traders Big Weekend Edition - Part One and Part Two

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

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Part One - Erich's Trades:

Lesson du Jour
How do you arrive at your profit targets?

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:
Fib levels, especially the 50% and 62%, but on larger trends, or long term charts the 38% will sometimes be influential

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)

20 day moving average, which is a "moving" trendline.

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 [email protected] and I'll be happy to try and clear things up for you.

You can see a sampling of Erich's Markets we're covering this week- Currencies and Energies (mini Natural Gas, Canadian Dollar and the British pound) along with charts at

A Sampling of Tom's Trades we're covering this week: T-Bonds and the Mini Russell.

Let’s take a look what the coming week has in store for us in trading opportunities.



Seems to me traders are on a hyper-sensitive watch for any signs of inflation which they think might spur the FED to more interest rate increases. In Friday’s Bond trading we dropped a full point minus 6 ticks on reports that one had to really reach for the case to be made. In fact, many would say the drop was not at all supported by the data but traders shrugged it off and went the lower route anyway.

The coming week is rich with reports that speak directly to the inflation issue. Monday we have the New York Fed manufacturing report, Tuesday it’s the Producer Price Index (PPI) and the FED’s Industrial Production report. On Wednesday we have the big kahuna of inflation reports as the Consumer Price Index (CPI) comes out. On Thursday we turn attention to the employment report and the Conference Board’s Index of leading economic indicators.

Look for some choppy up and down trading for the whole week. If we can get to -00 and -16 to open the day along the way our methods should be productive. I’ll try to relegate my trading to -00 and -16 at least initially but will not be afraid to jump on the quarters if need be.

Friday’s session closed at 110-11 so we’ll be focused on 110-00 and 110-16 for Monday morning. I’m also going to be poised to take a flyer off 110-08 either way. If we look at the daily chart we’ll see that 11-08 and 110-00 are critical support levels for Bonds.
DECEMBER Eurodollar

We did break .620 so I decided to hold the trade over the weekend. .600/.595 is the next critical level to get thru. I now have the stop at B/E and will quickly bail if .620 is exceeded on Monday.
For those not in and looking to establish a trade on Monday, I’d be willing to sell a break below .595 or buy a failure as it rose above .600. Stops are at .625 on the sell and .595 on the buy. The only management that makes sense is thru the use of periodic RRR.
DECEMBER Canadian $
No mystery in the CD charts this week. We’ll buy a failed rest or break back above 8800. I’ll also sell a break lower. Targets are at 8920 for the buy and 8700 for the sell.

I also like the 8840 level and will buy a break out higher or sell the failed retest there as it breaks lower. I’ll use the same targets as above.

There’s S&R all along the pathway to each of the targets at 20 point intervals. We need to keep the stops rolling along behind any trade that’s making progress. We know in the currencies we have enough price flow to get trades almost every day so it is imperative that we come away with profits on every trade that gives them to us. There is no sense in allowing profits to dissipate where such high trade frequency exists. Be ever mindful of your periodic RRR.

We’ll use the same stop structure as usual … 3’s above on sells and 7’s below on buys.

DECEMBER Mini Russell

Strong earnings reports persist and all the economic reports seem to be reinforcing the “soft landing” the FED keeps talking about. That makes for a pretty rosy picture for stocks as the DOW continues to set new highs. This may be an October that breaks the normal pessimism that usually prevails during this month.

I doubt we’ll see anything in the reports to change the tide of higher values in the indices. This is going to test our ability to enter trades until we get some backfilling forming structure we can get our analysis teeth into. We are in for some lean times I fear in light of the huge advance of Thursday and Friday.

Here are the numbers currently in play for the December contract:

750, 748, 745, 742, 740, 738, 735, 732, 730, 726, 722, 718, 715, 712, 710, 706, 704, 702, 700, 698, 696, 694, 690, 688 and 680.

To get the full Big Weekend Edition with both Tom's Trades and Erich's picks, join us at

Good trades to you!