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Catching Big Waves - a trader's journal of surfing the the markets
I used to work in Photoshop a lot for a previous career. Over the Christmas break I took some time to play with a vision of trading. I liked that the wave almost turned to fire at the end, and feel this image portrays at least some version of futures trading. Especially from a individual trader's perspective. The guy who actually rode this wave could probably teach something about patience, practice, believing, ignoring noise, staying focused...
Can you help answer these questions from other members on NexusFi?
This is the continuation of a chart posted a day or two ago. Notice that the confluence zone shown previously did become the resistance zone, and that after the minor trendline broke, price tested the back side of it (in the zone) and then plummeted.
I have seen this exact pattern many times. Had that not occured while I was sleeping that would have been an excellent short opportunity. But I thought I would post the pattern after the move anyway, because I can't count how many times I have seen that happen.
Just thought I’d provide the final analysis of the Elliot Wave Formation that
fashioned itself on Friday the 13 of January, 2012 in CL.
This pattern occurs daily on both the 13 and the 21 range chart.
The astute technician that can patiently wait for it, watch for it, and execute into it daily
will never be short of great opportunities to take chunks from the market.
These trades take off pretty cleanly once they set up, typically rising with bursts of volume once the wave candle completes.
I have been blogging about these daily, so I’ll keep it up. I’ve really learned that repetition is the way to train yourself
to spot these opportunities and take advantage of them.
There were major downgrades of France and Austria’s credit rating by the credit agency Standard and Poor’s this morning, causing a big drop in the Euro, which triggered a rise in the dollar and a drop in the CL 2-12 contract. Once CL reached 97.71 it bounced and headed higher.
I watched price rise from the lows then saw my Momentum indicator go into the upper Power Zone as the 21 candle wicked high above the 13 period EMA (Green Trigger Line) at 10:30 a.m.
At this time price was girding it’s loins for a run up. I watched closely as Wave 1 of a potential 5 part Elliot Wave series formed. Price then reversed at the 34 range 13 per EMA and came down, forming wave 2. As price drifted back up again my eyes instinctively turned down to check the Power Zone - my coined phrase for momentum above 66.67 -… price was bouncing up from just below the upper Power Zone band, at about 62 on the indicator.
As the indicator came back up above 66.67 into the Power Zone, volume began spiking. Once you are in this part of the Power Zone, AND a Wave 3 pattern formation is in play, look out. A very big trade may be in the works.
Keep in mind that this is a reaction to a news play. France and Austria were downgraded, sellers grabbed hold, things got out of control to the downside, and now we have a possible corrective move.
It’s good to remember that futures markets are no different from any other markets. Just because prices are lowered, doesn’t mean they are on a one way mission to hit zero. Give the people a good deal, and they’ll come out of the woodwork to buy. I don’t care it it’s cars, coffee, cashews or crude oil.
The chart I'm watching is a 21 range bar chart. 21, as you might know, is a Fib. level. It’s a very interesting thing about Fib Levels. As the first Wave 3 candle completes on the 21, I almost always see a major spike in volume. I think that this is so, primarily because the major money managers are watching these levels as well. I’ll never forget once when I saw a 34 range candle complete in the beginning stages of a Wave 3 on the short side. Massive orders were sold directly into that level, and not a tick before. I had not seen anything like it before that time. That was the moment I was convinced that institutional players watch these levels like a hawk.
Today, volume spiked as that candle candle completed at 98.22. You can see all of this charted on my blog, but since I don't have 5 posts I can't give you the address yet. Watch for more posts, and then eventually you'll be able to visualize what I'm saying. Interestingly, sellers got involved right away and pushed it down to 98.16. It’s the rule more than the exception that the 2nd push through a level is the one that will really jump, eliminate heat from your trade and get you to a comfortable level to be able to set a break even stop without getting bounced out. Not wanting to miss the trade, I grabbed it at 98.18 as it bounced up and it immediately took off Northside.
Now came the hard part. The trade went up 20 pts almost immediately, then stalled and started selling off. Not wanting to take less than 15 ticks, I sold mine at 98.33. A few minutes later, price was at 98.92, which was just below a major trend line. How could I have known that price would not hit my stop and head right up another 59 pts? I could not have known. However, that shouldn’t matter.
You see, I think it’s important to know when you have a diamond in the rough, vs a lump of copper. Both are precious minerals, both are not in their optimal state, and both have potentially higher value in the future, once they are processed. But one of them has a tremendously higher potential value than the other, and that value will not be realized unless it’s given a chance to manifest. What happened in this case is that price did stall and most certainly would have come very close to my stop had I not taken profits. And sometimes that’s exactly what happens. However, sometimes your entry is exactly according to your rule set and you have to tell your self that you need to give price a chance to go. It just needs a chance to go. Because the other thing that is quite common and that occurs with regularity is that price will come back to check these important levels, and it usually ends up looking like a long wick on a bull candle, in the case of a long.
So what’s happening there? Well, it’s a shake. Someone is trying to shake you out of your position, because they know it’s a good one. They want your contracts. Now you have two choices.
You can give them your contract(s), keep an eye on it, and try to get back in if the level looks solid. Or you can keep your original stop and just calculate that it’s a shake and that it will bounce hard off your entry level. You’re probably better off keeping your original stop and holding on. It really depends on how well you like your entry. It’s always a tough decision. This kind of thing usually happens with entries that are bound for glory. It makes holding them very difficult, and if you get out, it makes watching them run without you even more painful.
I wish I had an easy answer for you on this. Like a lot of situations in trading, it’s a judgement call. A lot of traders will simply move their stop back to about 5 ticks below entry and hope for the best. That usually will keep you in but at not too high of a cost if you’re wrong.
I believe the way that daytraders can let profits run is to find those diamonds in the rough (I believe the best of these are the Wave 3 setups) , calculate logical targets, and simply strap in and cut the trade loose. If it stops you out at break even, you can always get in again. If the level is true and the momentum is still good it will rise (or fall) again, as the case may be.
Getting to know the wave patterns in their larger, 5 part Elliot formations, getting in at the right time and riding Wave 3 can be the difference between a tremendously successful day and a mediocre one. So it’s important to make the right decisions once you are in one.
What’s exciting is that if you are on your toes and keeping a watchful eye out for this pattern, you will see them form with extreme frequency. With time and with practice, you will sense the times of the trading day that are the most ripe with opportunity – corrective moves after news, the NY open, and if you are fortunate enough to have access to them, floor trader pivot levels, to name just three. The key to the whole thing is confluence.
The best setups always occur during a confluence of pattern, in an important structural area, at a key time of day. My personal preference is to make sure the PowerZone is in the recipe as well.
I’ve found that it always adds that extra spice I’m looking for.
