I wrote a trilogy on some new software that I have been using the past couple of weeks … whoopdedo right? While there are plenty of software packages available to traders out there, I think this code should hit home with traders because it really focuses on the trend of price. I have found that most intra-day traders get caught up trading against the dominate trend and/or don't stay with a trend long enough to maximize their profit potential.
Anyways, I'm not saying all traders should use the system but I think reading the three blogs will open some traders' eyes about how they look at intra-day trends. For that alone the trilogy is worth the read.
Part 1 of the trilogy goes over the software and its color coding features, the second the software code's histogram feature, and finally the third covers a couple of hours of intra-day trading from a recent day to show how it works.
Check it out if you want to learn more about trend trading … here is the third part of that trilogy. Cheers …
SPY 1-Minute Candle
So the first smart trade is to short after we get a weak bounce higher. When you are looking for/expecting a corrective bounce, traders can start projecting the finishing zone for the move as soon as the "A" part of the bounce is complete. Once that is done just sit back and wait for the pattern to complete itself.
So we short as soon as price gets into this zone? No … projected target zones are like dark blue candles in that they are something we expect to catch the end of a wave but it is not a guarantee.
Step back for a moment … is the goal of traders to find and trade the top tick in a wave's ending thrust (impossible on a repeatable basis)? Or is it to find a good risk/reward spot to get positioned for larger moves in a dominate trend?
I would argue that the goal of any good trading strategy is to get traders long/short when the evidence is good that the trend has reasserted itself. In our case above, that is when we have the completion of an apparent corrective ABC pattern, price making it into our projected target zone and then the momentum of the trend having burned itself out.
The actual trigger is for the down trend to "announce" itself again by having the candle "turn" red again. Remember, the candle color is dynamic and can change right up until the candle closes, at which time the color is fixed forever.
Once we have what we think is the end of the corrective bounce, not only can we get short when we see the first red candle (with the stop being above the last swing high), but we can project out the target zone for the end of the next move/wave lower …
So what does price actually do?
So price makes a strong move lower and hits our first target … there is no reason to think that price is finished its move/trend here. Depending on each traders preference, he/she might take partial profits on the breaking of the candles' high as noted on the chart. I would also recommend lowering the stop to just above the moving average at this point ($122.65) to lock-in a winning trade.
Again until proven otherwise, there is no evidence that price has stopped going lower. Give yourself all the room on this trade to allow it to work if it is going to go lower. Balance that against proper risk management … take partial profits and tighten up your stop to prevent this trade from turning into a loser. No reason to get out here.
Price looks like it could be finished going higher … project out the next level to watch for and then sit back and watch what happens.
When trading the 1-min chart, traders have to remember that there will be more waves than those traders working with 3 or 5-min charts. What 1-min traders have to be aware of is to not get trading against the trend of the higher time frames if those charts still point lower.
But assuming here that we are trading the 1-min charts, traders need to take profits on the first short of the day and then reassess the merits of the short trade on higher time-frame charts, and if it still makes sense, to find a spot on the one-minute chart to get short again.
Since a green candle has appeared the nature of the bounce here can be expected to be slightly different than we saw on the previous "all-red" bounce. We are likely to see more strength by buyers of the SPY which means that we could see a more defined corrective pattern (possible "ABC").
To recap the first trade … we were triggered short at about $122.80 and then triggered to cover at about $122.10. Risk management may have had us take profits on the first part of our position at higher levels but all-in-all, a nice risk-reward trade.
Let's take a look at the 3-minute and 10-minute charts …
SPY 10-Minute Chart
The 10-minute chart shows that the down trend is still in full force … a dark blue candle has appeared, but we have not seen the histogram start to roll-over or produce any divergence as of yet.
Price has not reached the next obvious level of support but price is making a long-legged candle here so the risk-reward is obviously changing and making further shorts less attractive.
SPY 3-Minute Chart
The 3-minute chart will often provide nice looking wave structures for intra-day trading … for the life of me though I can't put a nice looking count on this one.
Price has made it to the target zone based on the previous corrective wave … also note the divergence on the trend's strength. That is what you normally see when a bigger trend is coming to an end. It is often a mistake to jump the gun when you start to see divergences though.
One of the nice things about the LWTT system, is that until you get a green candle, the trend is still officially down. The intended purpose is to keep you in the trade as long as humanly possible.
SPY 1-Minute Charts
So knowing that the risk of going short is increasing, the 1-minute chart still made a text-book set-up for a short trade. Traders were triggered on the first red candle after the completed ABC pattern. Price stopped 1 cent short of the projected target zone … close enough for government work.
As noted on the chart, traders going short on the first red candle at best faced some heat on the trade early as price bounced back higher and actually exceeded the prior high by 3 cents … that could have caught the stop of some traders depending where they placed their stops.
Often when trades become extended, you get more whippy price action … that means traders should give trades more room (increases the potential loss) and/or reduce the position size.
Assuming that the trade was not stopped out, traders would have taken profits after the projected target zone was hit and then a green candle was printed.
The trade triggered short at about $122.20 and to cover at about $121.70, for a $0.50/share profit.
The most important thing on the chart here is that the histogram for the down trend shows that its strength is weakening even as price is making new lows … that is the signal traders needed to see to have them stand aside for any other short trades right now.
The trading day is only 11:45 am on the first of three days that I was going to cover with these blogs … what was I smoking? I think I will leave it there and write the rest of the story of these three days for the benefit of Premium Subscribers only … sorry about that.
Cheers … Leaf_West (visit my site … blog.tradingwithleafwest.com)