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Squeeze Me
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Squeeze Me

by ScottJanuary 23, 2011

Mole is alluding to some of his trend trading strategies, which I am hoping he will share.

I thought I’d do a post on an alternate method of trailing a stop during a short squeeze, or a runaway move. This is a standard trend following method, its stolen verbatim, and I use it whenever I can. One big move traded properly can make my whole year, and as I am a very agressive trader I tend to pyramid up, taking additional positions when price confirms my position.

First you need to know what a Spike Low, sometimes called a Swing Low, is. Swing low is a low with a HIGHER LOW either side of it.

This is not a swing low because it hasnt got ANY candle on the right side of it

But the next day it is

Price action driven by short squeezes has a particular look. It looks like its about to top any minute, it makes it emotionally difficult to buy the high. It entices top pickers with very plausible looking reversal setups on lower timeframes, which fail, continuously.

Look at the $spx for the last few months. Its been going up, but the daily ranges overlap, a lot. That means that any given day someone got long, he is likely to be underwater (in loss) at some point the next day.

Take a look at the price action for the Euro unwinding of 09, see how during the sections which were down for multiple days in a row, it wasnt all one way traffic. In fact each day OVERLAPS quite a bit with the previous day.

This is the key to this type of price action, its what drives it.

Obviously a different type of trailing stop is neccessary. I’m convinced this is the optimal method for trailing a stop in extended moves.

Ordinarily I am in a big hurry to get my stop to breakeven, to guarantee I dont lose money. Thats a BIG MISTAKE in this type of price action. I accept the risk to the stop loss at the start, and I dont move my stop up UNTIL a new spike low (swing low) is formed, at which point I move the stop up. I have to wait until the day after its formed, because as demonstrated above, a spike low has a lower low on BOTH sides of it, and the current candle CANNOT be a new swing low.

I have an additional rule that I exit on the second consecutive close outside the bollinger band, but thats non-standard.

Take a look how this would have worked trading the recent blow off top in silver.

An even better example is the current move in $spx. This method would see you long for the ENTIRE MOVE.

This recent move in $spx is all fresh in your minds. Be honest, if you were long, could you have held tight for the whole move? Emotionally its almost impossible, even with the best of intentions. If you plan on riding out the massive moves, it makes it MUCH easier to adopt a mechanical strategy like this.

The downside is that you have to accept stop losses which can be a LONG way away from current price.


About The Author
Scott
  • Hungry_Joe

    Hi CS, thanks for all your posts. Terrific stuff there. In reference to your previous post and your often mentioned trade where price gets embedded into the BB, I wanted to know how you define this “embeddedness”. Is it a touch of the band, or close outside the band etc? Or is it something just visual or something?
    Thanks

  • Hungry_Joe

    Hi CS, thanks for all your posts. Terrific stuff there. In reference to your previous post and your often mentioned trade where price gets embedded into the BB, I wanted to know how you define this “embeddedness”. Is it a touch of the band, or close outside the band etc? Or is it something just visual or something?
    Thanks

  • http://chartsandthat.blogspot.com/ ultra

    Great post. Back from a week snowboarding and excitedly looking forward to the open tonight to see what ES and JPY are doing.

    ES move looks like it could be the start of something interesting, especially on the 4 hr. SPX:TRIN 34-day SMA at an interesting juncture too

    http://tinyurl.com/5ub3u4t

    PS what is it with Disqust? It has now stopped working for me entirely in Firefox? Having to use Chrome..

  • SW6

    Try updating your plug-ins. When my Firefox plays up, a plug-in update always remedies the situation.

  • Pingback: Game Time! | the evil speculator - one nefarious trade at a time()

  • http://chartsandthat.blogspot.com/ ultra

    Thanks for the tip – has sorted it out as advertised.

  • http://evilspeculator.com molecool

    Thanks for that.

  • Joe_Jones
  • http://chartsandthat.blogspot.com/ ultra

    Copper inside day on Friday as well as the obvious bearish divergence at the high

    http://stockcharts.com/h-sc/ui

    NYMO the same, although the StockRSI is suggesting we *may* see a bounce first (at least in this indicator)

    http://stockcharts.com/h-sc/ui

  • http://chartsandthat.blogspot.com/ ultra

    Silver declining relative to gold…

    http://stockcharts.com/h-sc/ui

  • http://chartsandthat.blogspot.com/ ultra

    NYA50R – you could just trade off this bad boy by the look of things, wait for a divergence, then take the next candle set-up that comes along… (assuming we get a sell-off from here – ha)

    http://stockcharts.com/h-sc/ui

  • http://oahutrading.blogspot.com/ steveo77

    Gold is at a critical support point. Very few if any other analysis methods would show this. The PRS177, which is a channel line extension, tells us something that very few can see, much less understand, much less act upon.

    We have got a nice 11% profit on a mechanical trading system [SHORT] on GDX from BreakPoint Trades, however this PRS channel line has caused me to close out that trade. That is good enough.

    The “Cable” British Pound / USD currency pair has 2 reasons to want to push higher. The 78 Fibo and the PRS 177. This would also push US equities higher, although the multi-year correlations may be now at risk of no longer working.

    Also, Expiry week is done. The Monday after expiry often finds some good size fireworks to correct the antics of Expiry week. Sunday futures will be interesting. We banked some serious coin last Sunday playing the futures, which seemed to move in perfect 5 and 3 wave patterns, almost like shooting fish in a barrel. Not that I will complain, any win is a win gratefully accepted.

    Bond Interest Rates are at a 61Fibo, also looking a near perfect bull flag. Choose your own poison on how to play this. Perhaps TBT or even JNK? However, one concern is that there is so much media coverage about muni bonds being risk, and States being allowed to declare bankruptcy–defaulting on pension obligations and bonds. I have to take this amount of media coverage (it is large) as a contrary indicator–when they pimp it out that much, there must be some opposite plan coming out….like a TARP for borrowing for State Governments.

    This feeds back into my tin foil hatter theory of Fed Gov as the economic hit man, enslaving everyone, including State Governments with debt. What a great plan to consolidate power at the Federal Level. Time will tell.

    http://oahutrading.blogspot.co…/

  • Turps

    CS, I tend to use a swing (low or high) as an entry point. Is this where you scale in your pyramiding?

  • convictscott

    No I take additional setups in the same direction on daily charts and 360 min charts as pyramid points, once my original stops are at breakeven, so i never have more than 1R at risk.

  • convictscott

    Its visual for me, but using stochastics like Mole does could give a more objective and mechanical version of the same thing

  • convictscott

    “Gold is at a critical support point. Very few if any other analysis methods would show this. “

    Dont know how you come up with that. Virtually *every* method, indicator, or plain old trendlines show gold as being on the precipice of a major collapse.

    Hell you should read the STU, according to them gold is about to start a major decline šŸ˜‰

  • http://oahutrading.blogspot.com/ steveo77

    Sorry, I let my EWI subscription lapse last week and my trading has improved…gladly I hope you get the punniness of this. Good job on the posts at ES!

  • convictscott

    :-)