Blog for Trading Success

I’ll postpone today’s planned topic until tomorrow. There is a pattern and a principle in the S&P that are so illustrative of my approach that I just have to mention them. But before I forget, Trader’s Interview did an interview with me. Here’s the link:

http://www.traderinterviews.com/wimpy_mp3_php/myWimpy.php?episode_in_feed=1

Now onto the pattern.

PATTERN:

In ‘Rob Nicholas’ USDJPY, I introduced one way that a sideways market forms. If we view a sideways market as being a bell curve, the market first forms a rejection at two extremes and then the Value Area. In Figure 1, I have shown the pattern,

FIGURE 1 S&P 5d Value Area Formation

In this context, the market usually breaks the bottom of the Value Area and then moves to the Primary Buy Zone, 1270 to 1280 (basis cash). If instead it breaks above the top of the Value Area, we’d usually see the high at 1369 breached. In an uptrend, we’d be expecting a strong breakout above 1369 because the market ought to have breached the bottom of the Value Area; instead it broke up above the top of the Value Area (Negative Development).

PRINCIPLE

Principle of Context: If I were right about this market being in a bear phase, then I would not expect to see a strong upside breakout. I’d be looking for the maximum extension at 1380 to hold. Since I have Ray Wave and MIDAS targets coming in at 1370 to 1373, I’d be looking for the market to break above 1369, hold 1373 and the close below the Primary Sell Zone of 1369 to 1270. My stop would be above 1380.

All figures above are basis cash. Now let’s turn to the E-mini March data for the period Jan 23 to date.

Figure 2 shows the combined profile from Jan 23 (1270 low) to date.

FIGURE 2 Combined Profile

Figure 2 shows a number of essential data points:

1. The Primary Sell Zone is 1400 to 1392
2. The Maximum Extension above the Primary Sell Zone is 1426
3. The Value Area is 1365 to 1325
4. The Primary Buy Zone is 1270 to 1280.

So, we’d need a close below 1392 and our stops would be above 1426. If we get set at 1380, our core profit target would be 1280. So we are risking about 40 to 50 points for at least 100 points, an attractive risk-reward.

The Value Area is complete on the formula I use to determine this and the Profile looks visually complete. It would not surprise me to see a strong move that begins a new IPM tonight or tomorrow night. The only question is in what direction. As I said above: a break above the top of the Value Area would suggest a breach of 1400. If this is followed by a bear-close below 1392, we have a trade.

Breach of the lower end of the Value Area would suggest that the market is moving towards 1270 to 1280 basis March. I’d skip this breakout trade to the downside because the probability of success and the risk/reward makes the trade unattractive.

To take the trade, we would need to lower the stop to above the Value Area, say around 1367.7. Entry would be around 1317. Core profit target would be 1280. We’d be risking 50 points to make 30. Unacceptable to me.

What about a closer stop?

Closer stops e.g. a stop above the Point of Control (1367.5) would increase the probability of being stopped out and then see the market move in my favour. Not for me.

There you have it. Today I showed a further example of the ‘SW Pattern #2′ and how I modify my trade around a pattern by its context. Tomorrow I’ll continue with the next post in the series: The Steps to Success.

Bookmark to: