Rick asked: “Were the above your reasons for exiting the position? Since your preferred trading time frame is the 18D, can I say that your exit was on the last 1/3 of your position as along the way, you should have taken out 2/3 of your positions?”
To answer the question, there are a number of preliminary comments I have to make:
- In an Upthrust (Spring) Change In Trend Pattern, there is a very high probability that market will head to the opposite Primary Zone; and
- A high probability that the market will begin a change in trend. In the case of an Upthrust, this means a change from an up trend to a down trend.
- If the Upthrust fails to at least reach the opposite zone, the high probability support zone (I call the ‘Death Zone’) that stops the down move will range from below the top of the Value Area (66.67%) to the 50%; a moderate probability zone will be the bottom of the Value Area (33.33%) and the 50%.
- By very high probability I mean greater than 90%; by high probability I mean greater than 75% to 90%.
- An Upthrust fails when the market fails to reach the opposite Primary Buy Zone.
- A Failure usually results in a strong breakout above the Primary Sell Zone (in the case of an Upthurst)
- The minimum target for the 13-week Upthrust was 105.447 to 102.922
Now let’s turn to the analysis I did before I took the trade. The 13-week ‘Death Zone’ is 116.391 to 113.023.
FIGURE 1 is the 13-week (quarterly trend) chart of the 30 Year Bonds. It shows Primary Zones, the top and bottom of the Value Area and the Maximum Extension. One more point; the 13-week provides a context to my 18-day (monthly trend) trader’s time frame.
FIGURE 1 13-week Swing 30 Year Bonds
Figure 2 shows the 18-day and:
- The black lines are the 13-week reference points: ‘The Death Zone’ etc.
- The 18-day had its own Upthrust signal with it’s own Primary Buy Zone 113.137 to 111.750. I treated the 18-day ‘Death Zone’ as a low probability event because I believed the 13-week structure was in control.
- There were a number of spike support areas slightly above 113.137 (around 113.250).
- In addition the 13-week ‘Death Zone’ ended at 112.413.
The first time the market signaled the Upthrust, the entry bar was too far into the congestion to take the trade. So I looked for a retracement back into the 18-day Primary Sell Zone. In early October, the market had a high of 122.2810, into the Primary Sell Zone on a strong bullish bar.
I now had to prepare for entry. I’d have a short if the market had a outside reversal day, or a conviction day down or an inside day. A inside day signaled a sell because after the strong day up into the Primary Sell Zone, we ought to have seen upside continuation. If I did sell, then I decided my first target would be at 113.5000, just above support.
If we did get a conviction bar, I expected to get in at around 120.00. My stop had to be above high at C.
To determine my stop, I reasoned as follows: my profit on the 1st third would be 120.00 - 113.50 = 6.50 (Rule of 3). Since the profit would need to cover the remaining 2/3 position, a profit for each 1/3 would be 3.25. This meant a stop at 123.25 (120.00 + 3.25) - BUT that was below the high at ‘C’. So, I decided to set the initial stop at 124.07. This exceeded the 3.25 points.
To compensate for this, I decided to bring the stop down to breakeven on part of the position (1/3) once I exited the first 1/3. I did this on the assumption that if the market rallied off the Primary Buy Zone, I would exit all shorts since the 18-day PBZ and the 13-week Death Zone overlapped.
The setup bar took the form of an inside day. I entered the day after the inside day at 120.06. I exited the first 1/3 at 113.510 and exited all positions at the close of the day marked in Figure 2. I did not go long.
FIGURE 2 18-day 30 Year Bonds
What you want to notice is the amount of preparation that took place BEFORE I entered the trade. Now it’s true that in this case, the market followed my road map - most times it doesn’t happen that way. But by having a ‘proper preparation’, it’s much easier to adjust to a plan that allows for most detours.
Refer this blog post to a friend or colleague…
