Now Reading
Trading lesson # 666
101

Trading lesson # 666

by ScottJanuary 14, 2011

A few hours ago I posted this setup. Now I’m going to show you one way (not the only way) but the mental process I use when I’m in a trade like this. Now I have to admit, I thought that yen futures were going to go down, in other words, I WAS BIASED. Now because biased traders are losers, I posted the setup, both LONG AND SHORT. Now I noted both the long and short potential of this setup (its an obvious triangle) and put in an order to buy at the high and sell at the low.

That much is easy, price broke up to the upside, got us long. We leave the short order in to act as a stop.

What now? I tell you what I don’t do! Sit in front of the screen. I go away! I set an alarm and come back. Experience tells me that whatever I get from sitting in front of the screen, I lose by impulsive stupid premature exits.

In one hour’s time I sit back at the screen and  I ask myself the following questions

1) Has my trade made 1R? If so my stop must be at
least breakeven.
2) Have 3 periods elapsed ? If so I must exit or have
my stop at breakeven or better
3) Is there a setup in the opposite direction I need
to prepare to take? Make sure I enter the order in the
system.
4) Is there some upcoming spike high, fib resistance,
momo divergence (on whatever indicator I use) or
bollinger resistance that would cause me to get out of
the trade early? If so would I take profits on a limit
order, or tighten stops, possibly to a lower
timeframe?

Lets look at how this plays out. Period 1, we have entry, lets ask the questions.

1) Has my trade made 1R? No

2) Have 3 periods elapsed ? No

3) Is there a setup in the opposite direction I need to prepare to take? Make sure I enter the order in the system. Yes, a FAKEOUT SELL (see yesterday). Enter a sell order in the system so if our stop is hit we WILL BE SHORT. Triangle breakouts are notorious for false breaks, so this makes sense.

4) Is there some upcoming spike high, fib resistance, momo divergence (on whatever indicator I use) or bollinger resistance that would cause me to get out of the trade early? If so would I take profits on a limit order, or tighten stops, possibly to a lower timeframe? Yes, that old spike high will trigger stops, there is no way to tell if price will go higher or stop and reverse. Prudence dictates that at least partial profits should be taken at the old spike high.

OK at the end of period 2 it looks like this. I moved the stop to the bottom of the bar because the trade had made 1R, and a cautious trader would be scaling out here:

2) Have 3 periods elapsed? No

3) Is there a sell setup? No

4) The upcoming spike high remains, have limit order resting in the system to exit.

Period 3  We move the stop up to the low of the recent bar to protect profits.

Period 4) Our limit order is hit and we have a potential sell setup


About The Author
Scott
  • http://thefxspeculator.blogspot.com Onorio

    Man we`re having more posts than comments!

    GPBCHF signal activated

    http://www.screencast.com/t/mZ

  • http://thefxspeculator.blogspot.com Onorio

    SELL signal

  • http://iberianviews.blogspot.com/ catracho

    nice posts BUT too many? No time for discussion or other analysis of the mkts…

  • fisheggs

    Scott, Thank you for posting these! Will be digesting these over the day and the weekend.
    I'm sure these will help me improve my trading.

    Moleage – Good move to get CS guest posting as he provides the best *trading * commentary and I'm sure we can all use the help improving our trading.

  • Turps

    Scott, I haven't had time to read your first post yet!! I will endeavor to do this over the weekend. This one is a beauty and gives some valuable pointers for maintaining your discipline during a trade.

  • http://thefxspeculator.blogspot.com Onorio

    Im actualy trading 2 pairs, USDJPY and GBPCHF…one moves 10 pips/hour and other moves 100 pips/hour. How fun is that?!

  • http://thefxspeculator.blogspot.com Onorio

    Regarding to the last posts, i didn`t have the time to check it but will try during the weekend.
    Either way, tks for all the work you had sharing this stuff.

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

    Doing this one on the daily, so just gonna move the open & stop down day-by-day as it drops. The retrace did look too shallow as it was, so this is not suprising.

    Looks to be a forming a wedge as it goes on the hourly – nice looking EW-wise as well.

    Silver playing ball again today meanwhile. Good stuff.

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

    EURUSD looking like it could be setting up here as well – backing off the breakout high on the hourly

  • http://thefxspeculator.blogspot.com Onorio

    Hey ultra, remeber the USDJPY breakout we`re talking yesterday? Might be playing from this morning 82.40 low…above 83.40 watch out for 84.70

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

    At the day job, so just looking on the web, but it seems you might be right. Looks at a glance to be breaking out of the wedge that I was on about.

    EURUSD reversed at the same time too. The plot thickens.

  • http://thefxspeculator.blogspot.com Onorio

    Me too 🙂

    If the EUR reverse to new lows, that gotta be the major bull trap i`ve seen in years

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

    That is probably what the eurocrats want. Still, might as well make some money out of it.

    http://tinyurl.com/4lbayb6

  • http://www.tradingsign.com/ T. Waffle

    Good morning people! how's it going? Are you all set for some correction in the market?

  • volar

    OK looking at back testing a system and getting a new broker.

    TOS or Tradestation

    Thoughts.

    I love the charting in TOS, but can you backtest?

    Tradestation I know u can, but is its charting good? Can you even build something like a Zero per say in tradestation?

    Mole you prob have the best insight to this…

  • volar

    BTW I am out of the CAD/USD as it did not act right- .000somethingR loss

    May close MXN/USD if she does not act right – stop at 1R Loss

  • raised_by_wolves

    I've never ever used TOS thinkBack (shame on me) so can't tell you anything about this tool other than it remembers prices including option prices. Is that all that is needed for backtesting? Maybe another TOS user (ahem, someone else answer the tiger's question) can provide more details for you.

    Speaking about TOS in general, I really liked them before TDAmeriTrade bought them. I still like them except that they released updates a couple time that were not release quality and caused me a headache or three. However, the customer service was still superb, and the issues were fully resolved a day or so later.

  • raised_by_wolves

    Holy horse radish! How many posts have there been in the last 24 hours!?!

  • skynard

    Yes sir, the question is how much?

  • http://www.tradingsign.com/ T. Waffle

    Near future around 1180 or so.

  • Bob the Horse

    If by correction you mean mkt going up, then yes.

  • Bob the Horse

    Without wishing to complain (totally appreciate convict's efforts), it does make it hard to continue a conversation. I answered someone (ultra?) 's question on Banks the other day but now it is about 4 posts back!

  • http://www.tradingsign.com/ T. Waffle

    LOL! i think we are pretty much done with upside may be some minor push but it will fade away soon.

  • Bob the Horse

    You mean 2013.

  • captainboom

    Agreed. A bit like drinking from a fire hose. It's nice to follow CS's thinking as a trade evolves. Mole, is it possible for CS to add to an original post? That could keep the topic together on one page, as well as the comments. It's nice to have the original post time, so if it's possible to add to it, it would be good to post the times of additional comments.

  • tradingmom

    Love the new additions to the blog — thanks CS! Also, love this divergence setting up 🙂

  • volar

    he first day with zero (playing Zero by smashing pumkins lol)

    anyways is this divergence to sell to VWAP here?

  • per

    Picked up some FXE putters this beautiful morning. Making a play on the trading range scenario.

  • BobbyLow

    VIX with a 15 Handle now. Good to see that there is absolutely no risk in this market. 🙂

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

    The retest variation sell setup is now there and fully formed on the hourly.

  • gsavli

    i miss the good old days, when this type of wedge with these divergencies could only resolve in one direction (NQ hourly):

    http://www.uploadgeek.com/shar

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

    A bit like drinking from a fire hose

    *snigger*

    Ok, ok – check you guys all complaining about TOO MUCH of a good thing! The guy just got the keys to the shop – give him a little time to settle in please, sure things will smooth out in due course.

  • Bob the Horse

    you should be grateful that you are being offered insurance at such great prices.

  • http://evilspeculator.com molecool

    Not a real divergence yet. Give it time and wait for a more pronounced setup – no reason to rush your entries.

  • http://evilspeculator.com molecool

    Yeah, let him wear himself out. I'm sure he'll slow down in a few days (I hope – LOL).

  • BobbyLow

    Nah. As of 11:41 AM EST, the only thing I'm grateful for regarding this market is for having 2 Open Long Positions that are up while showing strength and 2 Open Short Positions that are down that are showing a little weakness.

    Actually having a pretty good morning even though the S&P is only up about 3 Points at this very moment. 🙂

  • http://evilspeculator.com molecool

    Tradestation or Bloomberg if you can afford it. TOS is the best consumer app available though IMNSHO.

  • http://evilspeculator.com molecool

    NinjaTrader and Zenfire for trading futures. Has equidistant charting and you can code in C#.

  • http://evilspeculator.com molecool

    He's in Australia, there was enough time but we were all sleeping.

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

    Really? That sounds interesting – will have to check it out.

  • raised_by_wolves

    After making another $$$ on my JAN 11 30 SLV puts, I sold them two minutes ago and bought JAN 11 27 with today's profits. This way, my bank roll is fully protected if SLV were to bottom without going below 27. And, of course, if SLV does go below 27, I will bank more coin.

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

    Glad to see you got on that boat. they always look the scariest before they pay off.

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

    pssst,Mole can't pimp out his own site (or the great eye of Google shall smite he) and remind y'all to visit some sponsors, but I can remind you, know what I mean?

  • volar

    SO TOS is the best in in your NSHO, but does it back test? If it does, i may use it bc i am a 1-3 man group. And BB is out of the question. I will look at NinjaTrader and Zenfire tho

  • gsavli

    INTC, which gave a boost to nasdaq indices yesterday after hours is red today, while COMP and NDX both green.

    go figure.

  • http://futuresrhythms.blogspot.com/ Scrillhound

    Don't even think about TOS. I use Tradestation and am happy with it for backtesting, etc. Do you know Easylanguage? TS also has high fees. I'm prob moving over to Global Futures for my execution but will keep TS for system stuff/ reports

  • raised_by_wolves

    1-3 man group? Calvin, Hobbes, and . . . whom else?

  • captainboom

    You can set up a paper trading acct in TOS and play with it if you like. I use it to watch what's going on, as I like the charting better than Interactive Brokers. IB's charting sucks, but their fees are pretty low.

  • Bob the Horse

    Since I allowed myself to fall into the warm embrace of Bernanke at the end of Nov, I'd had a great run. I've learned to love the bomb.

  • http://futuresrhythms.blogspot.com/ Scrillhound

    My pivots for today's scalping. Let's go, 86-88

    http://content.screencast.com/

  • raised_by_wolves

    Yeah, we all need the keys to secure our financial futures. Learn the truth today, yo!

  • http://futuresrhythms.blogspot.com/ Scrillhound

    TOS is great for indicators, terrible for designing systems and reports

  • BobbyLow

    Not that there's anything wrong with that. 🙂

    http://www.teachwithmovies.org

  • volar

    I have IB- hate the charting and hate it all for that matter.. I cant even figure out how to do a ratio chart/ spread trade and customer service is terrible. Commissions are just as good w/ Tradestation.. I just love the charting on TOS

  • volar

    LMAO

  • bshah

    This is lovely… Mkt is up no matter what.. I heard I think on bloomberg radio that this is 7th week where S&P is up.. Damn… wtf.. Every damn stcok is making all time highs.. AAPL, EMC …

  • raised_by_wolves

    I don't know if this is a C or the beginning of a 3. Even if it's a C, I wouldn't be surprised if those JAN 11 27 puts become in the money next week. I'm not running a stop loss on them. I'll take 300% profit or let them expire worthless. Also, I can make them a hedge if I get a long setup.

    http://content.screencast.com/

  • http://futuresrhythms.blogspot.com/ Scrillhound

    Pivots on the Euro been good today:

    http://content.screencast.com/

  • raised_by_wolves

    I've been thinking about switching to Options House for my options trades.

    http://www.optionshouse.com/

    If I do, I'll still use TOS for my charting. TOS would become my super small secondary account. OH would be my still small but growing steadily primary account.

  • ds2

    Bought MCP Feb 50 puts this am – up 10%. Apparently insiders will be out of lock up soon – exact date unclear.

  • raised_by_wolves

    I've been sitting in this chair so long that all my cotton ball stuffing for my butt has matted down. At least you have an ass to laugh off. Because I don't.

  • http://evilspeculator.com molecool

    Fixed the images, sorry guys. Scott is still a contributor-in-training 😉

  • Bob the Horse

    Well, the simple fact is that the economy (in the US) is accelerating. That means be long equities. The threshold for not being long has to be very high, an RSI near 70 is basically irrelevant.

    Europe is not on the move – I think we have seen the peak of the sov debt crisis for a little while now. The biggest concern will be the Euro rallying all the way to the highs – that could puncture the recovery and send the PIGS back into the abyss. But that is a way off.

    All the things that can derail this rally, China, Europe, debt, yields, inflation, oil, etc. It's all either improving or nowhere near a pressure point. I think the SX5E can get to 3300 within the next 3 months, currently 2920.

  • http://evilspeculator.com molecool

    I'll do a little post on gold after breakfast 🙂

  • http://futuresrhythms.blogspot.com/ Scrillhound

    Avg range for /ES in Jan, I get 13 pts.

    From o/n low = 1287.25

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

    FX on the edge

    Which Edge you say?

    Euro is at a very important point.

    Fundamentals and technicals say it will be down. However, if it breaks up, and you are short as is my Euro futures short, you better be ready to take some lumps and figure out the next trade.

    The blow off top is the perfect sign the big traders ran this up to pop stops hiding behind prior high…that is what they do before they withraw their bid

    Cable is nearly the same situation.

    If you see 3 news articles about Euro stability, that strengthens the short stance. If you see 3 articles about “the Euro is toast” better watch out shorts!
    http://oahutrading.blogspot.co

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

    Can't you leg into a spread and lock in most profits?
    Do you play front month options (the theta is disgusting to me unless I am selling that theta).
    Just saying cause EWI reinitiated their silver short after they were ramped up the ying yang. Market loves f'n with EWI

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

    You can play history likes its real time and test your systems like that. however, that is tedious and not a back test as you desire.

  • ds2

    I see a trend line on the hour non smoothed zero.

  • raised_by_wolves

    Are you suggesting that instead of closing the ITM position and buying a smaller OTM position, you would keep the ITM position and leg into a spread? The advantages would be that I'm locking in profits and avoiding theta burn, eh? The disadvantage would be that my potential profit is fixed instead of theoretically infinite. I'll have to think about this and play around in TOS Analyze.

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

    I cant think about this right now, but I think you can structure more upside but also guarantee some profit should this 78 retracing whipsawing want to get you market acts up. Or just get into all Feb and March so at least theta is not stealing your profits.

    My results on swing for the fence options has not been good.

  • volar

    simple guys- either it acts as it should (ABC or 123 etc) but ..she must take out 28.125 for it to matter. Otherwise i am covering my SI short

  • volar

    the tail is the backup for a matted cotton stuffed but

  • per

    So far so good. Happy with entry point. Thanks for trading idea and analysis. 🙂

  • raised_by_wolves

    I have the low as 28.10 for SI. So, she must take out 28.10 for it to matter. 🙂

  • Turbodrive

    Fitch downgrades Greece
    http://www.fitchratings.com/in

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

    EURGBP – looking weaker by far than EURUSD, nice trendline retest, setting up for Monday methinks – or you could wait for a retest on the 4-hour and play the same way.

    http://tinyurl.com/4dwljkj

  • bshah

    guys,
    is this thing has only one way up…? i want the short cover / POMO inflated / manipulated high to fade.. will it ?

  • BobbyLow

    Bob the Horse,

    I'm still waiting for the Boards to be taken off “Main Street” Store Windows before I truly believe that the economy is improving without using “Fuzzy Math”. But it doesn't matter because I'm convinced that the Stock market has nothing to do with the Economy anyway.

    As stated before, IMO, the Stock Market is a Casino. Right now the probabilities favor the Long Side. It's taken me way too long to realize that it's the Tape and nothing but the Tape that matters.

    In the recent past, I began moving around from sector to sector like a Bee moving from flower to flower. I'm maintaining a balance between Long and Short Dollars at risk and have no “trading” bias.

    And thanks to Convict Scott's prodding, I have my own set of rules for entry and exit. I've got a long way to go but I can feel some of my Swagger coming back. I also realize that I've got to keep that in check too. 🙂

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

    One way to read this ES move – chart is incorrectly titled, it's actually a 15 min one

    http://tinyurl.com/4cmwddx

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

    Looks like we are going to see a new low in the VIX then

  • raised_by_wolves
  • raised_by_wolves
  • captainboom

    So, if VIX closes outside the lower BB (looks equal now), then we might want to look for an equities sell signal early next week? If I recall, that would be the earliest we could see the signal.

  • volar

    This zero is going to take some work, but im willing to learn.

    Still playing Zero by Smashing Pumpkins for the hell of it

    Checking out Ninja Trader…btw

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

    Funky

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

    Yes, we are under the BB as of now. Confirmation of signal could come Tuesday close at the very earliest.

    But bear in mind that we had back-to-back sell signals from the VIX mid-December that counted for precisely jack, so don't crack the shampoo just yet. Sooner or later one of them will actually pay off, but in the meantime it's just another indicator that has had its bollocks cut off by the might of the Bernank and his Xerox.

  • captainboom

    Market's closed on Monday, yes? That's why I said Wednesday.

  • raised_by_wolves

    How about just taking the buy signals during this QE2 period?

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

    Naturally, they have worked like a charm.

  • gsavli

    to spot a buy signal, you need a calendar. if it says it's monday, tuesday, wednesday, thursday or friday, then it's affirmative – you have a buy signal.

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

    Yep, you are right. My bad.

    Assuming we get the end of the day ramp, it might *actually* be worth a small punt short at the close for a quick win:

    http://tinyurl.com/5u7bf4o

  • raised_by_wolves

    🙂

  • volar

    agree…. but keep in mind equities have had a down December like 4x since 1940. every sell signal i ever had in sentiment said bulltard.

    So its January… i would take this more seriously- just like I am taking the ISEE more seriously

    To wit: look at the seasonality of the Call/Put and AAII sentiment data

    http://content.screencast.com/

    http://content.screencast.com/

    http://content.screencast.com/

    Here is the seasonality of the S&P… DEC is not worth fighting IMO

    http://content.screencast.com/

  • raised_by_wolves

    Take any confirmed sell signal next week as a go to cash signal, but don't short. Not using SPX or SPY anyway.

  • captainboom

    ZL broken? I'm not seeing updates after 15:09 New York time.

  • tradingmom

    Me too.

  • convictscott

    new post

  • raised_by_wolves

    ¤ø„¸¸„ø¤º°¨¨¤ø„¸¸„ø¤º°¨
    ¨°º¤ø„¸ 5 N E W „ø¤º°¨
    ¸„ø¤º°¨ P O S T S “°º¤ø„¸
    ¸„ø¤º°¨¤ø„¸¸„ø¤º°º¤ø„¸

    😉

  • BobbyLow

    Got stopped on Short of XLP for a -.4R Loss but took +.7R Profit on XLK and +.8R Profit on KBE. So net was +1.1R on the three. The Stop on XLP was by rule. But I took profit on the other two as an offset and because I didn't want that profit sitting there being all alone and vulnerable until Tuesday Morning. 🙂

    I'm left with one open position of a Short in Retail (XRT) which is flat.

    This still looks like The Land of Oz where the market only goes up. That is – until it stops doing so. Patience.

    Have a great weekend everyone.

  • gsavli

    rotfl :))