Ql Txehu1hz.pdf

technical

strategyvolume 2: January 2010-December 2010

anthology of the Sfo magazine monthly column

this series was originally published from January to December 2010. © 2010 Sfo magazine. all rights reserved.

technical strategy

low-riSk efficiency 2by kirk northington

traDing the 3-Day rSi moDel 4by ed carlson, cmt

baSe breakout 6by harry boxer

ooPS! traDeS 8by michael J. carr

“the cowboy” gaP faDe 10by Scott andrews

hiDDen Divergence in the forex market 12by James chen, cmt

new uPtrenD DetectS winnerS 14by kate Stalter

the all-Star entry 17by Sam Seiden

buy low-riSk breakoutS 19by todd krueger

time axiS offerS key to fx traDeS 21by Jamie Saettele

the avalanche 24by toni hansen

“the heat” gaP faDe 26by Scott andrews

no part of this publication may be reproduced or transmitted in any form by any means, electronic or mechanical including photocopying, recording or by any informative storage and retrieval system without the written permission of wasendorf & associates inc.’s president.

this publication is strictly the opinion and conjecture of its writers and is intended solely for informative and educational purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. this publication is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. information is obtained from sources believed to be reliable, but is in no way guaranteed. further, there is no guarantee of any kind that is implied or possible where projections of future conditions are attempted. the publisher is not liable for typographical errors.

commodity futures, securities, options and forex trading involve risk and are not suitable investments for everyone. any investment should be carefully considered in light of an investor’s personal financial objectives and risk tolerance.

articles and/or advertisements contained herein may provide hypothetical or simulated performance results. hypothetical or simulated per-formance results have certain inherent limitations. unlike an actual performance record, simulated results do not represent actual trading. also, because the trades have not actually been executed, the results may have over- or undercompensated for the impact, if any, of certain market factors such as the lack of liquidity. Simulated trading programs are also subject to the fact that they are designed with the benefit of hindsight. no representation is being made that any account will or is likely to achieve profits or losses similar to those shown. further, past performance does not guarantee future results.

Source: tradeStation

Figure 1: vf corporation (vfc) 60-minute chart

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Entry bar Exit bar

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Resistance 1,100

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Northington RSIV (40, 30, 100, 75, 25, 0, Red, Green, 7, Black)

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managing risk is what separates traders who are successful over the long term from those who

experience success only briefly. this strategy illustrates an example of gaining trade efficiency

with low risk.

Backgroundin the november 2009 issue of Sfo, i introduced the northington rSiv indicator. i demonstrated

how it should be used specifically for identifying efficient trend entry points. in this case, i com-

bine it with another volatility measuring tool to find an efficient trade entry.

in the week prior to oct. 12, 2009, the S&P 500 index completed a 46-point advance,

equivalent to 4.5 percent. consequently, the broad market was entering the second half of its

January 2010

Low-risk eFFiciencyby kirk northington

back to table of contents

3

short-term swing cycle. going forward, i expected to see an increase in whipsaws and pullbacks.

So, i looked for a stock with a beta (volatility measurement) that did not exceed one.

getting ini found just such an opportunity with vf corporation (vfc), which had a beta of 0.93. i deter-

mined adequate trend strength in a daily chart timeframe via other means. figure 1 shows how

price had resumed its uptrend on the hourly chart but had pulled back slightly. this is indicated

by a close of more than two units of average true range beneath the stock’s 40-period linear

regression line. the “fabric” lines represent deviation from the 40-period continuous linear

regression plot, using increments of average true range.

meanwhile the northington rSiv indicator was below an extreme threshold of 25. this shows

how price is oversold within a trend-compensated measurement.

these two conditions mean that if i believe the uptrend will continue, this is likely to be a

highly efficient entry point. therefore, i took the long position at $75.06. these two indicators are

available for open download at metaSwing.com.

getting outi am a swing trader who lives within a two- to five-day trade duration. as such, i look for a way

to leave as little money on the table as possible within my timeframe. to determine the best exit

point, i based my decision on metaSwing volatility-based resistance for the S&P 500 index and

for vfc itself.

oct. 19 i determined that the S&P would see hourly resistance at 1,098, and vfc would

encounter daily resistance at $77.91. therefore, i made the decision to exit at either of those two

points, whichever occurred first.

when the S&P crossed 1,098 (see figure 1 inset), i exited the trade at $77.80; the day’s high

went on to be $78.08

Bottom LineSo how can you beat the index with a sub-one beta stock in a high-risk market? across the time

duration of this trade, the S&P 500 gained 1.86 percent, while vfc made a 3.65 percent profit.

this strategy produced a profit that was double that of the broad market, and it was done with a

low beta stock. further, it performed with a trade entry efficiency of 82.3 percent and a trade exit

efficiency of 92.4 percent.

kirk northington is the owner of northington trading llc and the creator of metaSwing, a metaStock and tradeStation add-on. he is the author of volatility-based technical analysis: Strategies for trading the invisible. he is a private trader and uses the technical analysis methods of metaSwing exclusively. reach him at [email protected].

Source: metaStock

Figure 1: S&P 500

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S&P INDEX (1,098.64, 1,098.54, 1,086.16, 1,091.06, -6.84993)

MKT VOLTLYNDX (21.5500, 21.7600, 20.9000, 20.9000, -0.59000), Relative Strength Index (4.66364) (MKTVOLTLYNDX)

Relative Strength Index (54.1851)

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february 2010

trading the 3-day rsi modeLby ed carlson, cmt

the three-day rSi model is an extremely short-term trading model i created that presents the

trader with a nice opportunity once or twice a month. its goal is to find days when the market

has become too stretched in one direction and there is a high probability of a “snap” back to

the trend.

Backgroundthe model uses welles wilder’s relative Strength index (rSi) set to three days, rather than

the 14 days that is commonly used. the three-day rSi is overlaid on both the S&P 500

index (SPx) and the volatility index (vix).


5

setupbuy signals are generated by a simultaneous move below 20 by the SPx three-day rSi and over

80 by the vix three-day rSi. Sell signals are given by the opposite setup (SPx three-day rSi over

80 and vix three-day rSi under 20).

i normally use options to make these trades profitable as the period is short and the market

move from this signal tends to be small. using options, rather than index funds, can make for a

highly profitable trade. i check my charts 15 minutes prior to the market close every day looking

for this setup.

if the opportunity presents itself, i enter the order just before the close. Sometimes, the market

will snap back before the close, and i exit a profitable trade that day. however, my normal game

plan is to be out of the trade before the close on the following day.

Very short termDespite the examples in figure 1, it must be stressed that this is a short-term trading

strategy. by short term, i mean the holding period is one day, two at the maximum. under

no circumstances should a position taken from this model be allowed to turn into a longer-

term holding. not all trades are profitable, of course, but losses can be minimized by

remembering the discipline to sell quickly.

figure 1 shows, from top to bottom, SPx price, the vix three-day rSi and the SPx three-

day rSi. i have noted with ovals and dashed, vertical lines those days when the rSi indica-

tors simultaneously exceeded the extremes noted previously. the chart shows not only the

short-term nature of the model, but two failures as well.

the first failure (mid-July) could have been avoided through a filter i use. i watch the daily

advance/decline line for breadth thrusts. i define a breadth thrust as a move exceeding 1.5

standard deviations over its 20-day moving average (bollinger bands). this filter does not

work in the opposite direction. that is, do not use a dip below the advance/decline line’s

lower band to filter out buy signals, as these are actually excellent buy signals in their own

right! the other failure occurred in october … a good reminder that no indicator is perfect.

ed carlson, the creator of the carlson confirmation model, is an independent trader and

consultant based in Seattle. Previously, he spent 20 years as a stock broker. he is a chartered

market technician and hosts the market technicians association Podcast Series (a weekly

audiocast featuring interviews with recognized industry professionals). he manages a techni-

cal analysis blog directed at financial advisors at Seattletechnicaladvisors.com. reach him

at [email protected].


6

march 2010

Base Breakoutby harry boxer

breakouts of long bases on strong volume are frequent harbingers of continued price apprecia-

tion. another predictor after the initial leg up is a low-volume, orderly pullback toward support.

an analysis of Sourcefire inc. (fire) seen in figure 1 illustrates this strategy. as the daily chart

indicates, in april 2009 fire broke out of a base pattern that went back to early 2008. Some

traders who missed entering early may have given up on the stock when it increased more than

50 percent from nearly $8 to more than $12 during the month, but a closer look at the chart

shows why it had more room to move.

fire’s pullbacks were orderly, coming on lower volume and holding near its moving averages,

a key sign of more upside to come. the pullbacks in the rising channel that continued to extend

into late December, the time of writing of this article, typically hugged the 21- and 50-day mov-

ing averages and even remained close to the 10-day.

the pattern was breakout and flag—and had been just about every month for this period,

with the most distinct breakouts after april coming in late July and then December where price

continued beyond the time of this chart to greater than $27 by month-end, or almost 3.5 times

its pre-april breakout.

Source: worden

Figure 1: Sourcefire Inc. Daily Chart

FEB

Volume: OBV

BOP: MS

MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 0908 FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

$35.92

$27.86

$21.61

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volume on each pullback was a small fraction of the level of the breakout, and a shallow

decline just grazing the moving averages suggested a continuation of the upward trend.

key Factorsas a stock in a rising pattern pulls back, look for several factors to portend the continuation

of the pattern. first, search for extremely low volume on the pullback—between 10 percent

and 25 percent of the average volume of the past 90 days. Second, watch for the decline

to flatten near the 20- or 40-day moving averages on the hourly chart in a quiet, narrow

flag-type formation.

getting in and outwhen the breakout comes, buy on the initial thrust out of the flag pattern. this means

a sudden dramatic change in price accompanied by heavy volume. the price does not

necessarily have to increase to more than the top of the flagpole (i.e., the previous rally

high prior to the consolidation). it only needs to be a price bar that is at least many times

the size of the previous several bars on the chart.

wait to add to the position until the stock takes out the top of the flagpole, which is key

short-term resistance. this will protect against a head fake, which is a move that starts out

dramatically but quickly fizzles price- and volume-wise after just a bar or two, has no follow

through and, in particular, does not make it through the top of the flagpole.

on fire’s may consolidation, for example, this resistance level was near $12, which it

broke through by the end of the month. the next level came around the $13 line in figure

1. the break through this level sent the stock up toward $20 quickly, which in turn became

resistance in the august consolidation.

Set a stop below the bottom of the lowest level reached during formation of the consoli-

dation or flag pattern out of which it has broken. for fire, this was just near $10 in may,

$11.80 in July and then $17.75, which became support in the September, october and

november consolidation ahead of the December breakout.

fire illustrates the potential that chart patterns such as high-volume breakouts from

long bases and low-volume flags can have in predicting price appreciation.

harry boxer is the author of the technical trader, which features a real-time diary of boxer’s minute-by-minute trades and market insights, plus annotated technical charts and stock picks, based on his nearly 40 years of experience as a wall Street technical analyst.


8

april 2010

OOPS! TradeSby michael J. carr

larry williams’ oops! trade has been written about for at least 20 years, but it still works.

the oops! signal takes long or short positions against the direction of an opening gap. wil-

liams called it oops! because he noticed that when a market reversed an opening gap, the price

move tended to accelerate in the direction opposite to the opening thrust.

he thought many traders entered positions on the gap after reading classic technical analysis

books and would assume that gaps occur at breakouts.

when prices quickly reversed, they would be stuck with losing positions, and williams could

picture the traders saying, “oops!” as they exited their positions with a small loss.

any opening gap, whether up or down, offers a potential signal.

getting in and out• long: on a gap down, place a buy-stop at the previous day’s low.

• Short: on a gap up, place a sell-stop at the previous day’s high.

you can exit trades on the close or with a first profitable opening (fPo) exit, another tool

discovered by williams. his testing shows that you consistently make more money by holding

Figure 1: S&P 500 60-minute Chart

1,100

1,095

1,090

1,085

1,080

1,075

1,070

1,065

$1,950

Gap up on open

Close on 1/28/2010

Source: tradenavigator.com


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a position overnight. with an fPo stop, you exit the trade the first time a position opens with a

profit. you also need a stop loss, just in case markets move dramatically. a wide stop of at least

$3,500 a position works best.

some resuLtstesting this idea on the S&P 500 futures contract since the beginning of 2000 reveals 78.4

percent of trades would have been winners. figure 1 shows a trade example where an exit on

the close would have increased profits.

test results using the same basket of futures contracts used in “another look at futures trad-

ing” (Sfo January 2010) has a similarly high winning percentage of 74.2 percent. this system is

only in the market a small percentage of the time and can be combined with other strategies to

increase trading profits.

michael J. carr is chief market strategist at Dunn warren investment advisors. he is editor of the market technicians association’s technically Speaking and author of Smarter investing in any economy. reach him at [email protected].

this article is for information purposes only and is not intended to be investment advice.


10

“the cowBoy” gap Fadeby Scott andrews

may 2010

i am a gap fader. i trade the opening gap in the direction opposite of the overnight price move-

ment, looking for prices to retrace to the prior session’s close, thereby filling the gap.

historically, more than 70 percent of opening gaps in indexes such as the S&P 500, Dow

Jones industrial average, naSDaQ-100 and russell 2000, have filled the same day.

unlike stocks, the diverse composition of indexes makes it difficult for a single economic

report or earnings announcement to sustain opening prices for an entire session.

once regular trading hours commence and volume kicks in, the initial move often reverses.

the setupone of my favorite gap fade setups that has a high probability occurs the day after an index sells off

and finishes below its open and under the low of the prior day. this forms a red candle on charts.

after such a day, it is not uncommon for the overnight session to trend upward as speculators

build long positions in anticipation of a rally during the next session.

however, buying is often limited and selling may occur right after the opening bell as over-

night longs lock in profits and speculative shorts appear in anticipation of

another leg down.

Sometimes energetic buyers will run over those who shorted the open. in fact, i have nicknamed

this setup the cowboy because it often requires one to hold on and ride the trade as if it were a

bucking bronco. See figure 1 for a recent example of a winning cowboy setup that i traded.

the buying normally wanes as prices approach the lows of two days prior and sellers reap-

pear en masse, overwhelming buyers. the result is often an impressive reversal and a rapid gap

fill. this price action is often referred to as a dead cat bounce.

getting inmy preferred entry is to short the open with a market order precisely at 9:30 a.m. et with a stop

equal to at least 30 percent of the five-day average true range. for this particular setup, larger

stops are generally better and ideally can be placed above the lows of two days prior.

an alternative entry is to wait for a reversal above the open and near the low of two days prior.

i have tested both entry techniques and prefer the first approach because it catches all of

the winners. the second approach misses the easy wins, but it does result in bigger profits and

smaller losses.


11


1,100

1,108

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1,100

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12:00

Enter short here

Exit here at gap fill

14:00 1/25 12:00 14:00

1,102

the black line is the opening price. the blue line is the prior daily close. the red line is the prior daily low price.

getting outmarket conditions dictate my profit-taking plan.

if the market has been selling off for several days prior, then i generally target a price just in

front of the gap fill area.

if the downtrend is just beginning, then i may scale out near the gap fill and hold some for an

extended target that is below the prior day’s close. in the trading world, there is nothing more fun

than being short when longs are panicking and trying to exit all at once. ride’em cowboy!

the cowboy gap fade can be quite rewarding for those who are prepared. Just remember, high

probability does not equal certainty, and risk management and proper position sizing should

always take precedence.

Scott andrews trades gaps for a living and is president of masterthegap.com, an education service that provides daily probabilities and tools to help traders more profitably play opening gaps. he is the author of understanding gaps. reach him at [email protected].

Figure 1: e-mini S&P 500 10-minute chart


12

June 2010

Price-oscillator divergences represent some of the most prevalent, high-probability trading

opportunities available in forex and other financial markets. these regularly occurring chart

signals should be heeded for their capacity to warn of either price momentum changes or

trend continuations.

BackgroundDivergences occur when there is an imbalance between price action and an oscillator, which is

a mathematical derivative of price. examples of common oscillators include: stochastics, relative

strength index (rSi), moving average convergence divergence (macD), macD histogram, rate of

change (roc), commodity channel index (cci) and many others.

Figure 1: Bullish Hidden Divergence

Source: fx Solutions—fx accucharts

higher low

lower low

hidden diVergence in the Forex marketby James chen, cmt


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under normal circumstances without divergence, an oscillator that measures momentum

should follow price. the extremes (peaks and valleys) in both price and the oscillator should be

in relative agreement. higher highs, higher lows, lower highs and lower lows on the oscillator

should correspond with those of price action.

once divergence occurs, however, the indication is that price and the oscillator disagree with

regard to momentum. this temporary aberration can be a significant indication of events to come.

every technical trader should be aware of two types of divergence. regular divergence indicates

the potential for a reversal in current momentum, resulting in a possible trend change. conversely,

hidden divergence indicates the potential for continuation of the current trend momentum.

higher oddsas regular divergence is more well-known, in this column i only discuss the lesser-known type:

hidden divergence.

many traders believe that of the two types of divergences, the hidden variety is a higher-

probability potential trading setup. this is due to the fact that hidden divergence is an indicator

of potential trend continuation as opposed to a potential reversal indication.

trading with the trend is considered by many technical analysts and traders as a higher-

probability type of trading than attempting to pick tops and bottoms, which is essentially the type

of trading approach encouraged by regular divergence signals.

like regular divergence, hidden divergence is a technical imbalance between price movement

and oscillator movement. but instead of signaling a potential reversal, hidden divergence is used

primarily to signal a possible continuation in the prevailing trend.

BuLLish and Bearish signaLstwo basic manifestations of hidden divergence occur.

as shown on figure 1, bullish hidden divergence usually happens during uptrends and is charac-

terized by price making a higher low while the oscillator makes a lower low. in this case, price and

the oscillator diverge in their signals. the net signal that should be taken is for a potential continua-

tion of the higher lows in price, which is essentially a continuation in the prevailing uptrend.

in contrast, bearish hidden divergence usually occurs during downtrends and is characterized

by price making a lower high while the oscillator makes a higher high. once again, price and the

oscillator diverge in their signals. the net signal is for a potential continuation of the lower highs

in price, essentially a continuation of the prevailing downtrend.

the tradeonce an instance of hidden divergence occurs, cues can be taken from other technical indica-

tors to enter a trade in the direction of the trend.

one of the best ways to enter a trade after a hidden divergence signal involves waiting for

a breakout of a key support or resistance level or countertrend trendline in the direction of the

prevailing trend. Supported by hidden divergence, these trend-following breakouts often carry a

higher probability of success than if divergence were absent.

James chen, cta, cmt, is chief technical strategist at fx Solutions, a leading forex broker. he is also a registered commodity trading advisor and chartered market technician. chen is the author of es-sentials of foreign exchange trading and essentials of technical analysis for financial markets.


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July 2010

new uptrend detects winnersby kate Stalter

in every new market uptrend, a fresh crop of innovative, young companies emerge as leaders.

after the major indexes clawed out from the bear market in march 2009, early gainers included

apple, Priceline.com, green mountain coffee roasters and baidu.

these stocks—and many others—went on to become some of the market’s biggest leaders

during the next 12 months. what else do those companies have in common? each went public

sometime in 1999 or later.

new namesnew innovators, not the more mature companies, are typically the names that show the most

explosive earnings and sales growth in a new cycle. that, in turn, spurs price increases.

this leadership from the innovators has been evident in every market uptrend since the 1880s.

research showsnotice something important about the growth of these winners? these big gainers also launched

strong runups in spring 2009, when the market itself was also turning higher.

investor’s business Daily’s research has shown that three-fourths of stocks follow the market’s

direction. So it stands to reason that the best time for buying stocks is during a market uptrend.

(See figure 1 for just a few of the stocks that began big rallies after the market went into a

confirmed uptrend march 12, 2009.)

conFirmationSo after the market has been in a downturn, how can you tell for sure whether a new uptrend has

been confirmed?

Figure 1: Stocks with big rallies since 2009

stock gains 2009-apriL 2010

baidu 237 percent

Priceline.com 186 percent

home inns 94 percent


15

a proven way of making that call is with the follow through day. that is a day when at least one

of the major indexes—Dow Jones industrial average, S&P 500, nySe composite or naSDaQ—

notches a significant percentage gain. volume must be heavier than the previous session.

look at figure 2, a chart of the naSDaQ from summer 2006.

chart anaLysis• Point 1: on July 18, the index fell to a new low, and then began rallying higher. that was day

no. 1 of a rally attempt.

• Point 2: the next session brought a big price gain in heavier volume. but that was too early

to be a follow through day. the follow through generally happens after day no. 4 of the rally

attempt. that is because false signals can occur in the early days of a rally. it is common to

see huge buying immediately after fresh lows. but if it is too soon, the index often falls again,

reaching another low.

• Point 3: on aug. 15, the naSDaQ climbed 2.2 percent in heavier volume than the prior session.

that follow through came 21 days after the rally attempt began. this may seem like a long time

to wait, but it is a perfectly acceptable span according to ibD.

that particular follow through resulted in a successful market uptrend, which lasted until

february 2007.

Be aLert a caveat: about 25 percent of follow through days fizzle, so be especially alert for selloffs in the

early days after a new uptrend is confirmed. if the uptrend is fragile, you will generally see heavy

selling within just a few sessions.

every new bull market since the 1880s has started with a follow through. it is absolutely nec-

essary to see heavy volume buying to confirm an uptrend. in the days and weeks immediately

Figure 2: NASDAQ in 2006

Source: Daily graphs online

IndexScale

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239239261229151173206228251128143016219521724MarchFebruaryJanuaryDecemberNovemberOctoberSeptemberAugustJulyJuneMayApril

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Volume (00)

Nasdaq Composite - 2006

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IndexScale


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after the follow through, you will see the strongest stocks—those young innovators—begin their

big price moves.

words oF wisdomit is worth considering a few words from ibD founder william o’neil in his book how to make

money in Stocks.

“a follow-through [sic] signal doesn’t mean you should rush out and buy with abandon. it just

gives you the go-ahead to begin buying high-quality stocks with strong sales and earnings as

they break out of sound price bases. ... remember, no new bull market has ever started without a

strong price and volume follow-through confirmation. it pays to wait and listen to the market.”

kate Stalter is a market writer and commentator at investor’s business Daily and investors.com.

She hosts the daily market wrap video at investors.com.


17

august 2010

the aLL-star entry by Sam Seiden

Figure 1: Research In Motion, 60-minute Chart


the key to selling anything for a large profit is to sell to a novice buyer who does not know or

understand the real value of what you are selling.

the best traders master this skill. here i present a simple rule-based market timing strategy

that focuses on buying from and selling to novice traders who do not know how to assess the

real market value of something. i call it the all-star strategy due to its potency as a low-risk, high-

reward and high-probability entry technique.

-75

-74

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5/65/54/144/13 4/164/15 4/204/19 4/224/21 4/264/23 4/284/27 4/304/29 5/4May

DemandT2

T1

Supply

Short Entry


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Backgroundthe all-star entry uses two high-probability tools that when combined help identify high-probability

turning points in any market. these are:

• Proper supply (retail price) and demand (wholesale price) analysis

• bollinger bands

the setuplook at the supply level shaded in yellow at the top of figure 1. this is a supply level because price

moved lower from that point in strong fashion, which tells me that supply exceeds demand at that level.

next, notice that when price rallies to this level, it pierces the upper bollinger band. this sug-

gests three things:

1. Price is reaching a level where supply exceeds demand.

2. Price is piercing the upper bollinger band, indicating that statistically price is at an extreme

and likely to revert to the mean.

3. novice buyers are purchasing at the supply level.

this information suggests price is likely to turn lower at that supply level. the combination is

what makes this a high-probability event.

the yellow area at the bottom of the chart is the nearest demand level below the short entry point.

the distance between supply and demand is the profit margin.

the profit targets for this shorting opportunity are the midline of the bollinger band (the mean,

t1) and the demand level (t2).

the Logicwhen it is time to sell short—at supply—who are the buyers?

they are novice market speculators, and we know this because they are committing the two

mistakes every beginner makes:

1. they are buying after a rally in price and outside the upper bollinger band.

2. the traders are buying at a price level where supply exceeds demand (retail prices).

these novices do not know how to quantify real supply and demand in the market, and these are

the people with whom we always want to trade, just like selling anything in life outside of trading.

aLL-star ruLeswhen price reaches a key supply level and pierces the upper bollinger band in the context of a

downtrend while there is a significant profit margin below, sell short at the supply level with a buy

stop just above the supply level.

Profit targets are first the midline and then the opposing demand level. the opposite rules are

true for long (buying) opportunities.

Bottom LineProfitable traders buy at wholesale prices and sell at retail prices like wall Street. novice traders

buy at retail prices and sell at wholesale prices. learn to spot the novice trader to attain low-risk,

high-reward and high-probability trades.

Sam Seiden is director of education at online trading academy. he has more than 15 years of

trading experience. reach him at [email protected].


19

September 2010

when i first started trading in 1985, upside breakouts had a decent success rate. but cur-

rently they seem to fail far more often than they did previously.

upside breakout trades have become a mechanism for professional traders to trap retail

traders into losing positions. retail traders buy an upside breakout hoping that the price

will launch higher after it breaks above a previous high price level.

the great news is that retail traders can learn to read a chart to determine when the

market professionals are also interested in higher prices after a breakout.

when the smart money is not selling into the breakout, the odds of a successful long trade for

a retail trader increase dramatically.

the setuptraders should look for very specific conditions to set up this trade successfully:

1. Price must have declined so significantly from the previous price high that price is now

breaking through it. See figure 1, which shows 126 pips in this example.

Buy Low-risk Breakouts by todd krueger

Source: Stockcharts.com

Figure 1: The S&P 500 SPDR (SPY) Daily Prices and Volume

$1.518

$1.516

$1.514

$1.512

Previous price high

Entry on open

Close abovetrendline

Doji Test

$1.510

$1.508

$1.506

$1.504

$1.502

$1.500

$1.498

$1.496

$15,000

$10,000

$5,000

06:007/12/2010 7/13/2010

07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 03:00 04:00 05:00$0

06:00 07:00 08:00 09:00


20

2. the breakout candle must occur with high volume.

3. traders should watch for price to retrace to slightly above or below the previous high.

4. on the retracement, volume must be diminishing, which shows that the smart money is

not participating in the minor down move.

5. Preferably i would like to see a wyckoff candle volume analysis (wcva) pattern around the

horizontal line. in figure 1, an arrow points to a doji test candle. this wcva pattern indicates

that the smart money is not actively selling, and the price is expected to move higher.

getting inbecause there will be instances where traders do not receive a confirming wcva pattern

(but all of the other conditions outlined above are met), an alternate entry technique works

in all market scenarios.

notice the downward sloping trendline on the small retracement below the horizontal

line. i have also drawn the same trendline on the volume histogram below the chart so

readers can see the dramatic reduction in trading activity on the retracement. this trend-

line is used as a trigger to enter an upside breakout trade.

a trader should enter the market immediately after a candle close above this trendline. this

occurred at 1.5084 in the example. a market structure stop should be placed just below the

lowest low of the minor retracement (1.5064 is the low in this example, so one would go three

pips below with the stop).

getting outthe profit target is based on a point and figure count objective of 1.525. once price

achieves this, a trader should scale out of 50 percent of the trade size and keep trailing the

stop if price continues to move higher until he or she is stopped out.

in the example, the trader would have a 166 pip profit objective with a 23 pip protective stop,

and the reward-to-risk ratio would be an outstanding 7.2-to-1.

todd krueger is a full-time professional trader, creator of the wyckoff candle volume analysis

methodology and is the founder of traders code llc, a company that provides trading tools and

education for the retail trader. reach krueger at [email protected].


21

october 2010

time axis oFFers key to Fx tradesby Jamie Saettele

most traders pay little attention to the time at which they execute trades. the majority focuses

entirely on price (the y-axis on the price chart) and ignores time (x-axis).

ultimately, a trade is successful if one buys at a lower price and sells at a higher price. Sea-

sonality across multiple timeframes indicates a tendency for price extremes (highs and lows)

to occur at the beginning of the timeframe in question: yearly, monthly, weekly or daily (broken

into three sessions: asian, european and north american).

Figure 1: Euro/U.S. Dollar Equity Curve, May 25, 1998-Aug. 17, 2010

Equity Curve Detailed - EURUSD Daily (01/05/98 16:59 - 08/17/10 16:59)

0

70000

60000

50000

40000

30000

20000

10000

-10000

Equi

ty ($

)

6/13/00 11/21/02 5/4/05 10/16/07 3/31/10



22

the Breakdowni have compiled statistics specific to the euro/u.S. dollar that detail:

• the distribution of yearly price extremes by month from 1980 (using Deutsche mark rates pre-

euro) to 2009.

• the distribution of monthly price extremes by day since 1999.

• the distribution of weekly price extremes by day since 1999.

• the distribution of daily price extremes by hour since 2005 (the past five years).

the numBersSince 1980, the high for the entire year has occurred in January 11 times. the low for the year

has occurred in January seven times. Stated differently, January has produced the yearly high

38 percent of the time and the low 24 percent of the time.

in a random environment, one would expect a price extreme (high or low) to occur just 8

percent of the time (1/12 = 8.33 percent).

Since 1999, the first day of the month has produced the high for the month 13 percent of the

time and the low 14 percent of the time. in a random environment, one would expect a price

extreme to occur just 5 percent of the time (1/20 = 5 percent).

Since 1999, the first day of the week has produced the high for the week 30 percent of the

time and the low 30 percent of the time. in a random environment, one would expect a price

extreme to occur just 20 percent of the time (1/5 = 20 percent). friday produces the opposite

extreme 30 percent of the time.

Fx time Zonesfrom 2005 to 2009, the first hour of the trading day (22:00 gmt, the asian open) produced

the high for the day nearly 8 percent of the time and the low 6 percent of the time. in a

random environment, one would expect a price extreme to occur just 4.17 percent of the time

(1/24 = 4.17 percent).

the 6:00 gmt to 7:00 gmt period (the european open) produces the high and low 11 percent

of the time, compared with 8.33 percent for a random environment.

the 12:00 gmt to 15:00 gmt period (the u.S. open and when economic data is re-

leased) produces the high and low 21 percent of the time, compared with 12.5 percent for

a random environment.

using the datai can imagine countless scenarios in which this information is useful. for example, a longer-

term trader would look to establish positions only in the beginning of the year, month or

week. Short-term traders should establish and exit positions during the opening range hours

previously outlined.

a systema simple swing system would buy at monday’s high and sell short on monday’s close. the trade

would be held until friday and a limit order would be placed to exit a long position at thursday’s

high or a short position at thursday’s low. although fridays are more likely to produce a price ex-

treme, there is also a tendency for a friday pullback following a test of thursday’s price extreme.


23

the takeawaythe fact that opening ranges at multiple degrees of trend produce an inordinate number of price

extremes over time is fractal and offers insight into the psychological workings of markets and

herd behavior.

Jamie Saettele is an active trader, senior technical strategist at forex capital markets llc in new york and author of Sentiment in the forex market. his technical strategy focuses on senti-ment indicators, seasonality and elliott wave theory, and is published at Dailyfx.com. contact him at [email protected].

easyLanguage For tradestationif dayofweek(date) = 1 then buy next bar high stop ;

if dayofweek(date) = 1 then sellshort next bar low stop ;

if dayofweek(date) = 4 then sell next bar high limit ;

if dayofweek(date) = 4 then buytocover next bar low limit ;


24

november 2010

novice traders quickly learn that “the trend is your friend” and that the highest-probability trades

will be in the direction of the larger, underlying trend in the market. So, if the market is in an

uptrend with higher highs and higher lows, then we should be looking for buying opportunities.

trends do not continue forever, however, and even the strongest ones need a chance to rest. Some

of the strategies i favor are those that take advantage of these corrective stages in the markets.

about a dozen years ago, i was studying my trades and noticed that many of the corrections

taking place within a larger trend bore a strong resemblance to each other. continuations of

those corrective moves were often even stronger than the initial drop from highs. it seemed fit-

ting to call such a strategy an avalanche™.

the structure of the avalanche setup is similar to a mountaintop, followed by ledges that

often accumulate snow, producing conditions favorable to avalanche formation. Sometimes this

Source: mb trading navigator Pro 1.1.0.14

11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00 15:30 16:00 10:00 10:30 11:00 11:30 12:00 12:3009-30 Thu

uptrend

secondary target zone

initial target zone

200 20

stop levelshort trigger

moving average crossover (10 & 20)

volume drop & confirmation

$65.50

$65.00

$64.67922

$64.50

$64.26009

$64.188045

$64.00

100,000

9,777

CTSH.5:Main - Cognizant Technology Solutions Corportation - Class (MBT:MBT:ZFNU:3500

10

Figure 1: 5-minute Prices of cognizant technology Solutions corporation

the aVaLancheby toni hansen


25

strategy will be a part of a larger reversal pattern, such as a head-and-shoulders reversal. how

the avalanche setup is managed, however, is quite different.

the setupone of the first criteria i use for recognizing a developing avalanche deals with trend placement

and price extension.

the further advanced a trend is, the easier it becomes to develop a larger reversal pattern.

Strong overhead resistance is also ideal.

in figure 1, the highs established in cognizant technology Solutions corporation (ctSh)

Sept. 30 corresponded to the upper trendline of a larger uptrend channel that had been in play

throughout the month.

after striking resistance, i watch for a sharp reaction to that resistance zone. ideally, the

security will pull back more quickly than the previous rally. on ctSh that rally is not as evident

due to the gap, but the pullback into 10 a.m. et was still stronger than average when compared

to action in earlier sessions.

this pullback off the highs should fall sharply into a support zone. the most common is a

20-period moving average. the ideal setup will hug support on declining volume.

two smaller waves of upside within this period of congestion are common, such as in ctSh. Prices

can become wedged between the 10- and 20-period moving averages, and their convergence is a

sign of an imminent trigger. the trigger, however, tends to occur prior to the moving average crossover.

getting in the easiest way to enter is when the lower trendline from the congestion along the 20 ma

breaks. a more aggressive trigger occurs when the channel of the second bounce within the

congestion breaks lower. a stop is placed above the highs of the congestion.

getting outthe exit strategy varies according to the larger trend placement of the setup and strength of the

initial descent.

i typically use the 20 ma on the next larger intraday timeframe based on using the two-, five-,

15-, 30- and 60-minute charts. a 15 minute, 20 ma would be the target for a five-minute setup.

this came within 2 cents of the gap closure on ctSh and was near the five-minute 200 ma,

resulting in an initial target zone near $64.70.

the momentum of the descent, however, was stronger than average, and the larger trend

placement allowed ctSh to fall into a secondary target zone of $64.10 at the lower end of the

larger daily trend channel.

proFit From pLaying correctionsalthough trend trading is a profitable way to trade, understanding the nature of trends them-

selves is vital to your success. all trends need to correct and those adjustments alone can offer

high returns when played properly.

toni hansen is president and co-founder of bastiat group inc. and author of Simple Steps to trading Discipline. a leader in market education, she has worked in conjunction with some of the world’s top financial exchanges, as well as major industry conferences, with global syndication

of her daily market commentary.


26

December 2010

i am a gap fader. i trade the opening gap in the direction opposite of the overnight price move-

ment, looking for prices to retrace to the prior session’s close, thereby “filling the gap.”

historically, more than 70 percent of opening gaps for indexes such as the S&P 500,

naSDaQ 100 and russell 2000 have filled the same day.

unlike stocks, the diverse composition of indexes makes it difficult for a single economic

report or earnings announcement to sustain opening prices for an entire session. once the

regular trading hours commence and volume increases, the initial move often reverses.

the setupone of my favorite high-probability setups occurs after the markets have made a strong

move to the upside. Specifically, this trade occurs the day after an index rallies and


Figure 1: 5-minute e-mini S&P 500 Prices

12:00 13:006/14 6/15 6/1614:00 15:00 14:00 15:0010:00 11:00 12:00 13:00 10:00 11:00 12:00 13:00

1,084

1,086

1,088

1,090

1,092

1,094

1,096

1,098

1,100

1,102

1,104

1,106

1,108

1,110

“the heat” gap Fadeby Scott andrews


27

finishes above its open and the high of the prior day. after such bullish momentum, the

overnight price action often trends downward.

however, buying may occur right after the opening bell as overnight shorts take profits and

buyers appear in anticipation of another leg to the upside. Sometimes motivated sellers will run

over those who bought the open.

in fact, i have nicknamed this setup “the heat” in part because it often requires you to hold

through adverse market conditions, or heat as i often call it.

the selling generally wanes as prices approach the low of the prior day or the highs of two days

before and buyers reappear en masse. the result is often an impressive reversal and gap fill.

tip: Do not let the nickname fool you. Since 2000, 189 of 229 heat gaps (82 percent) have

filled the same day. See figure 1 for an example from June 2010.

getting inmy preferred entry is to buy the open with a market order and a stop equal to at least 30 percent of

the five-day average true range (atr). larger stops generally work better and ideally can be placed

below the lows of the prior day or the highs of two prior, whichever is higher.

an alternate entry is to wait for a reversal below the opening price.

i have tested both entry techniques and prefer the first because it catches all of the winners.

the second approach misses the easy wins and has a lower win rate, but it also has larger win-

ning trades and smaller losses.

getting outmarket conditions dictate my exit plan. if the market has been rallying for several days, then i

generally target just in front of the gap fill area.

if the uptrend is just beginning, then i may scale out around the gap fill and hold part of the

position for an extended target near the prior day’s highs.

it often pays to be on the opposite side of short traders when they are stuck and getting

burned (yet another reason i call this the heat gap). when it starts lighting up the shorts, watch

out above. remember: wild fires move faster uphill than down.

“the heat” gap fade can be quite rewarding for those who are prepared. Just know, high prob-

ability does not equal certainty, and risk management and proper position sizing should always

take precedence.

Scott andrews is a private trader, president of masterthegap.com (an education service that provides daily probabilities and tools to help traders) and author of understanding gaps. reach andrews at [email protected].

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