Don’t Forget to Pack All Your Tools! (part 1)

Don’t Forget to Pack All Your Tools!

I still remember my father telling me, “You can’t use a wrench if you left it at home, son. Always bring all your tools with you when you go to a job.” My father was a welder. I’m a professional trader. But bringing all your tools to the job at hand is just as important to me, and all traders, as it was to my father.

But when I say “bring all of your tools,” I don’t mean throw every new multi-derived curve fit oscillator whizz-bang on a chart when you’re ready to trade. I mean the tools you are familiar with, the tools you have mastered. And tools you may not think of as tools, like solid money management, risk reward ratios and simple profit target projection tricks that help you lock in profits. Sometimes the best tools are sitting between your ears—if you remember to pack them and then when the time is right, take them out and use them!

Probably the most active market is the cash foreign exchange market. The total amount of currencies traded every day dwarfs the value of all the stocks traded in one day, all the options traded in one day and all the futures traded in one day. In fact, it’s currently officially estimated that the cash volume being traded in foreign currencies worldwide is more than 10 times as much as the total cash volume being traded in all equities [stocks and options] worldwide! Currencies start trading on Sunday afternoon in the United States and trade continuously until late Friday afternoon. And because any time money flows from one country to another, currencies are traded—so there are plenty of opportunities to take advantage all the time in the currency markets.

Let’s take a look at one of the most active currency pairs: The Euro versus the US Dollar. I’ll be looking at simple 20 minute charts that cover the entire 24 hour day. The Euro had been gaining in value against the US Dollar all summer long and then in late July, a sharp sell off began. After several days of sharp losses, the Euro began to regain some ground on the US Dollar. Let’s take a look at a chart of that action now:

The Euro/USD has been in a nice down trend. After a near vertical fall of 133 pips, price has congested a bit, re-tested the low price made during the recent fall and has now begun to make higher highs and higher lows as it heads a bit higher.

I added a red down sloping traditional Median Line drawn from the high of this most recent move down using the latest swing high as Pivot C. This should give me a good feel for the direction of this market. The Median Line is a line of force and it projects forward in time and space the rate of rise or fall of price and the likely path price should oscillate around--In other words, it should show me where price should run out of up side directional energy and down side directional energy: at the Upper and Lower Median Line Parallels.

Now here is a simple yet powerful tool from my toolbox and yet, most traders never bother to use it. A wise and very experienced trader once told me that if people would only look at the projection of equal movements, they wouldn't need any other measuring tool when it comes to price projection targets. By this, he meant simply measure how far price moved on one major leg and when the next major leg begins, measure the same amount and expect that price will make it that far--and if you have the right position, take your money and run! Nothing fancy about this, but it is deadly accurate! In simple terms: The distance from A to B will then equal the distance from D to E. Can it go further? Yes. Can it fall short? Yes. But with solid money management, if you capture these equal movements on a regular basis, you will be taking the 'meat' out of a majority of the large moves 80 percent of the time.

Note that price has NOT moved above the Upper Median Line Parallel, so I am still bearish on this market. It would take several closes with quality separation above the Upper Median Line Parallel for me to consider becoming a buyer.

I simply measured the distance from the last high before the vertical drop began to the low made before price began its consolidation [that was 133 pips] and then went over to the last Swing High "C" and projected that same distance below Pivot C to give me the most logical place price would head to with the highest probability. This is a simple but effective tool. Using the simple assumption that the near vertical fall from Swing A to Swing B was 133 pips and moving over to the current high I am assuming is going to develop into Swing High C, I get a potential down side movement to the 136.35 area. Since price is currently trading near what I consider to be overhead resistance at the 137.50 level there is plenty of room below to capture a very significant profit if I can find a repeatable trade entry to establish a short position with good risk reward and solid money management.

Take the Noise Out of Your Charts to Find Better Trade location!

Take the Noise Out of Your Charts to Find Better Trade location!

What do major league baseball pitches, houses for sale and trade entries all have in common? Location, location, location! Major league baseball pitchers can hit 100 mile per hour fastballs fairly well if they are thrown over the heart of the plate. But if the pitcher can paint the corners of the plate with 100 mile an hour fastballs, most of the batters he faces will be sitting down grumbling after striking out. Similarly, if you look at two houses that are on the same size lot and are fairly similarly built, the one with the best location will sell faster and for more money. And what's that got to do with trading? If you can clear away some of the noise of the markets and add a few simple tools, you'll find that finding a quality trade entry location is a snap!

The E*Mini S&P futures are notoriously noisy during the US trading day and if you view a 24 hour Globex chart, they have periods of inactivity, which means that many indicators like moving averages and drawing tools like Median Lines are skewed by the passage of time during these dead periods. One solution that addresses both concerns is to use bar charts that are built with price on one axis and volume traded on the other axis: In this case, I have chosen to plot a new bar each time 5000 contracts trades electronically.

Depending on the level of activity of the current conditions, you can vary the size of the volume bars-when price is in an extremely active period, I chart 10,000 volume price bars and when price has settled down into one of those periods where six to eight point ranges are the norm, I generally move back down to the 5000 volume bar size. But either of these choices will do a good job of taking out the noise and eliminating the skewing problem associated with the dead periods in the 24 hour charts of these markets.

Now let's look at an actual trade example, in a step by step fashion, so you can see how I use these non-time based bar charts and incorporate a few interesting twists to help me locate quality trade entries.



Price has rebounded nicely from the 1311 ? lows made early in the prior day's session and is clearly in a strong up trend. Although price is trading well within the blue up sloping Median Line drawn off of the major pivots, note that it has not tested the Median Line or its Lower Median Line Parallel. In other words, the slope of this Median Line has done a good job telling us where price is headed, but these lines are untested! Be careful taking a trade off of them until they are tested.




Now note that price trades higher, making a new high, but then trades below and closes the prior swing low. And since price still has not tested the Median Line, this is a sign of weakness. We've now had three tests in a very confined area that tried to go higher and made little or no progress and now price is closing below prior swing lows! Note that I added a red down sloping Median Line and its Parallels after price closed below the prior swing low. I don't have a trade entry idea yet, but I do now have two signs of weakness: Price is closing below prior swing lows and price failed to make it to the up sloping Median Line [This is referred to as Hagopian's rule] and the combination has me concerned that we may be setting up for quite a large sell off unless price quickly makes some up side progress.



Price now trades lower and tests the blue up sloping Lower Median Line and then begins to form an Energy Coil or trading range. Note that to the right of the current price action, there is an area where two lines of opposing force, one up sloping and one down sloping, meet. This is called an Energy Point and especially when you encounter Energy Points within the vicinity of Energy Coils, you can assume that the Energy Point will act as a magnet to price-It will attract price and drag it towards itself! Looking at the chart, above, you can see that if that is the case, we really don't want to enter a trade until right at or very near the Energy Point, because there is no point in having our capital exposed if price is going to range trade! It's better to keep our capital safe and wait until we have a solid idea where price is heading and when price is going to break out of the tight range.



You can see that price is firmly entrenched in the Energy Coil and seems to be headed right for a test of the Energy Point or where the lines of opposing force intersect. In my research, I see time and again that these areas are where price will resolve its ranging activity, so I am generally willing to wait until price gets to within one or two bars of the upcoming Energy Point before committing capital-because there is no need to expose my capital to any risk if price is likely to remain in a range unless an outside price shock [which would be random in nature] moves price out of the Energy Coil before price and time come together at the intersection of the opposing lines of force.
Now let me show you a neat little way I've developed to help me tell which way price will resolve or move out of an Energy Coil.



Note that in drawing the Energy Coil or trading range boundaries, I've connected multiple tops and multiple bottoms and I've left a few extreme prices on both sides outside the drawn boundaries of the Energy Coil. These extremes are the false breakouts that plague so many traders that try to "out guess" the market by buying breakouts from trading ranges or triangles or diamonds. But they can also be very useful signposts if you have the tools to read them. One tool, the Schiff Median Line, can be used in conjunction with these extremes to give you an idea of the likely direction of the breakout. By using the alternating extreme false breakouts as pivots and drawing in an Schiff Median Line, the slope of the resulting Schiff Median Line gives us a good indication of the likely breakout from the current Energy Coil.
In the prior chart, I used the widest set of extremes, starting with a low pivot.



This gave me a down sloping Schiff Median Line. In this example, I began with the highest extreme pivot and again, it gave me a down sloping Schiff Median Line. Even though I began one Schiff Median Line with a low pivot and another with the extreme high pivot, both resulting Schiff Median Lines are telling me the likely breakout will come to the down side. Neither, tell me when or at what price, but they give me a strong indication that the break out will come to the down side. Now I need price location! And that will likely come at or near the Energy Point where the lines of opposing force meet.



Price has now crept sideways towards the Energy Point and is either right at it or one bar from it. And note that in the past 8 to 10 bars, price hasn't moved much. We've had several closes above the blue Lower Median Line Parallel and several below it-but it's still mired in congestion. What makes me think we're likely to break out now? The proximity of price with the Energy Point! Now that I've sat through the passage of a great deal of time as price re-stored its expended energy, I think the Schiff Median Line tool has given me a strong indication that price will break to the down side, so I am now willing to try to enter a short E*Mini S&P position. I want to sell S&P futures at 1320 ?, right at the Energy Point, and if my limit order is filled, my initial stop loss order will be three ticks above the prior three swing highs, at 1322 ?. And my profit target will be a test of the prior 1311 ? Major Swing Low-I'll put my profit order 3 ticks above this prior low at 1312 ?.



Price comes up and tests the Energy Point, exceeding it by one tick and getting me short in the process at 1320 ?. I always enter my limit entry orders and stop loss orders at the same time and then once my limit order is filled, I first double check that my initial stop loss order is still being worked-If it is, I then place my profit order. So in this case, I am short E*Mini S&Ps at 1320 ? with an initial stop loss order at 1322 ? and a profit target of 1312 ?. My initial risk is 2 ? points and my profit target is 9 points away, so my risk reward ratio is a very nice 4:1.



Price trades lower in an orderly fashion, eventually breaking and closing below the lower boundaries of the Energy Coil.


And after price leaves double tops at 1318 ? and then makes a new low for the move [which means these double tops should draw in sellers should price climb back to re-test them], I move my initial stop loss to a stop profit, 3 ticks above the 1319 lower boundary of the Energy Coil, to 1319 ?.


Price does come back up to test the double tops at 1318 ? several bars later and turns on a dime, telling me that there indeed were sell orders waiting above those double tops [which are now triple tops]. Then price again heads down in an orderly fashion, getting within a point or so of hitting my profit target at 1312 ? before congesting again and then turning higher. But the rally is short lived and price again leaves double tops. Because we have come down nicely and gotten very close to my profit target, I don't want to give away any of my hard-earned profits, so when price makes a new low for the day, I snug my profit stop to 3 ticks above the just made 1315 double tops, to 1315 ?.
Price again makes a new low but then consolidates again, testing the 1315 double tops several times-and each time, there were solid sellers in this area!



Once the buying dried up, price headed lower and soon hit my profit order at 1312 ?. Once I see my price print, I make certain that I am filled on my profit order and then I cancel my stop orders and double check two things: That I am working no further orders and that I bought and sold an equal amount of contracts. It's too difficult to make money trading to give it up to simple execution errors because of sloppiness.

Identifying Swing Highs and Swing Lows

I always pay strict attention to price formations when evaluating any market. Swing highs and lows are two of the most important formations to learn to identify. Many traders use these areas as entry areas on pullbacks when trading with the trend. Because their orders will be there as a ‘buffer’ to slow the counter-trend rise or fall of price, I often hide my orders above swing highs and below swing lows. But many traders, especially those just learning to read charts, have trouble understanding just what it takes to make a particular high a ‘swing high’ or a particular low a ‘swing low’.

Let’s start out by looking at two types of line charts that show swing highs and lows. By line charts, I mean the actual bars of data are not shown; instead only the extremes of price swings are connected, to give a chartist a clearer picture of the past and current price swings.





The first chart shows a specific method of charting swing highs and lows that was developed by W. D. Gann in the first half of the 1900’s. The second chart shows a more common method of charting swing highs and lows and it is this second method that I’ll be describing in this article. Note that in general, when marking swing highs and lows, I do not specify that X bars have to pass before a new swing high or low can occur. Instead, I let price formations confirm each new price extreme—and that’s the key to understanding what makes the top of a particular bar a ‘swing high’.



Looking at this chart, I have already marked in a Swing High “A” and a Swing Low “B”. And note that price has now climbed above the price extreme I labeled Swing High “A”. Does that make this new high in price a swing high? No, because I don’t yet know whether the new high is in place or if price will continue to work its way higher. In the back of my mind, I should be thinking that price is ‘working’ on a new swing high. But it is not a swing high until a price formation confirms it as an extreme high. It’s not as confusing as it sounds. Let me try to show a better example of extremes that are not yet confirmed by price formation extremes:



Looking at this chart, I see a series of lower lows and lower highs that came after price made an extreme high. But note that price has not yet traded below the prior low [at the far left of this chart]. Nothing yet says to me: “The extreme low is in for this swing!” That means a true swing low has not been put in yet. Let’s look at another example:



At first glance, it looks as if price left an extreme high and then traded lower and most traders would be tempted to say a swing high had just occurred. But is it a swing high? In this case, price made a new high and then came down and is now re-testing the prior low—In fact, at the moment the last bar is part of “double bottoms”, which is an important price formation but cannot be used to confirm a swing high or low. Only a low lower than Swing Low ‘A’ can ‘confirm’ the high that price made two bars earlier as a true swing high.



Price breaks below the double bottoms and the low of Swing Low ‘A’ and that confirms the high three bars earlier as Swing High ‘B’.



It takes new lows to confirm Swing Highs and new highs to confirm Swing Lows. Trading these back and forth motions in the market is swing trading.

Once you learn to identify swing highs and swing lows, you can begin to anticipate what it will take to make the next price extreme a swing high or low and how to use that in your trading.



Swing High ‘B’ is confirmed when price breaks below the prior low that formed Swing Low ‘A’ and note that price is now making a series of lower lows and lower highs. Has price made a swing low yet? Remember, only a new swing high above a price extreme can confirm a swing low. There is nothing yet to even hint that price has made an extreme low.



After the sharp fall, price consolidates, forming an Energy Coil [an area of tight congestion]. Energy Coils is generally a sign that price is re-storing energy, taking a break after an extreme move. Note that they are often followed by a series of false break outs, so it can be dangerous to blindly buy or sell break outs from these areas. Did price just make a new swing low? Let’s take a closer look:



I view the Energy Coil and the engulfing bar before it as a price formation. Now that price has climbed back above both the Energy Coil and the engulfing bar before it, the double bottoms below the Energy Coil are confirmed as Swing Low ‘B’. This is a classic bottoming formation, by the way, and unless price quickly ‘zooms’ through this area to the down side, this area should provide very good support. Note that we cannot identify a new swing high yet.



Once price breaks below the double bottoms that formed Swing Low ‘B’, Swing High ‘C’ is confirmed. It is this back and forth actions that swing traders learn to anticipate and trade. The better you are able to anticipate the formation and confirmation of these swings, the better your swing trading will be.



Even though price briefly penetrated the bottoming formation of the Energy Coil, this area holds a great deal of support and price soon trades higher, above Swing High ‘C’ and that confirms Swing Low ‘C’.

Understanding the nature of swing highs and swing lows is not difficult once you take a few apart and see just how they are built and what it takes to confirm each new swing.

I wish you all good trading!

Tim Morge

Swing Trading: Waiting for the Sweet Spot!

Waiting is one of the most difficult things for traders to do. Traders are generally high-energy individuals and the time spent between trades can often seem like unbearable agony. But it is important to remember that the market is always trending and when it is in a resting phase [congestion], waiting is usually the prudent thing to do. Positions initiated while the market is resting are generally "guesses" about the eventual breakout of a congestion area by a trader-and guesses are generally not very reliable. Rather than guess, I would rather wait for the market to show me which way it has decided to go before jumping in.

The chart below shows a typical congestion phase in the market. Price swings are showing both higher lows and lower highs-which means the range is narrowing as price restores its energy. Price will break out of this congestion area but at the moment, we can only guess whether price will break out to the up side or the down side.



If you look at the last bar on the chart, you can see that it is a wide range bar that breaks below the red down sloping Upper Median Line Parallel and closes well below it-with great separation! Does this bar give me the clue I need to choose a side?

It's an impressive looking bar at first glance but if you examine the chart carefully, you'll immediately see that although the bar has a wide range, it doesn't break below any of the prior swing lows. So it's simply a wide range bar still within the existing congestion. I need a clearer sign from price before I put my money on a trade.



Now price comes down and tests the blue up sloping Lower Median Line Parallel. Once price touches this lower line, it moves back higher and closes well off its lows with good separation. This last bar 'tested' the blue Lower Median Line Parallel but it didn't break below any swing lows.

Can I go long here, since price stopped at the blue up sloping line and closed well above it? Where would I put my stop loss order? I like to place my stop loss orders above or below price formations and there are no price formations to hide under. I still don't have enough information to place any money on a trade.



Now price trades a little higher, testing the red down sloping Upper Median Line Parallel it broke below several bars back. But there's nothing new about this area and price didn't' close above this line with any separation-and even if I wanted to go short there is no formation to hide my stop above. I'm still waiting.



Here's an interesting bar! Price breaks well above the red down sloping Upper Median Line Parallel but the rally fails miserably and price closes in the lower third of this wide range bar-which is a sign of weakness. But I'm not ready to take a position yet because price is still stuck right in the middle of the current congestion and it hasn't given me a single clear clue where its going when it breaks out.



This narrow range bar does nothing to shake my conviction that price is still congesting. Price has been above the red down sloping and below it, but price is really marking time. I'm waiting for a clear sign.



Price trades a little lower, testing the blue up sloping Lower Median Line again-so technically this is the 're-test' in a set up I trade consistently called a 'test and re-test'. But the re-test comes four bars after the original test and I prefer to trade on re-tests within three bars. I have found that the longer the re-test bar takes to occur, the less reliable the set up is. And just looking at the chart, price is still doing nothing more than working back and forth between the red down sloping line and the blue up sloping line. I'll continue to wait for a clear sign.



Nothing-new here! More narrow bars trading right at the narrowing intersection of the red down sloping line and the blue up sloping line. I have a fancy term for these areas where two lines with opposite slope meet: I call them Energy Points. And over time, I've found that they act like a magnet to price and attract it-and these interactions with Energy Points tend to be key turning points in markets. When price gets to this Energy Point or area where lines of opposing force meet, maybe it will finally give us a strong sign where it's going!



Just as price enters the Energy Point area, it breaks below the blue up sloping Lower Median Line Parallel. And it closes well below the blue up sloping line, in the lower third of the wide range, with great separation. Not only did price take out several prior swing lows, it left a nice set of triple tops just above the red down sloping line. I can hide my stop loss order above these triple tops! So now I have a clear sign from price of its probable direction and a quality formation I can hide my stops above. If price rallies back to re-test the red down sloping line-which would be right at the Energy Point-I'll get short and put my stop loss order three ticks above the triple tops price just left. NOW I am ready to put my own money on a trade.



Price rallies and tests the Energy Point, getting me short in the process. My initial stop loss on the short trade is three ticks above the triple tops and my initial profit target will be at the red down sloping Lower median line Parallel. If price gives me a chance, I'll hide my stops above formations as it works its way lower, boxing in profits.



Once price tested the Energy Point from below and failed to break back above it, you can see it was a one-way move lower. If I had spent my cash and emotional energy getting long and short and long short during the congestion, I would probably have been emotionally bankrupt and lost a tidy sum of money. And when price finally did give a clear sign of where it was going, I would have probably been so frustrated I'd have passed on the trade.

There is a time for patience. It's often the hardest lesson for traders to learn but waiting patiently and listening to what the market is telling you will improve your trading success and profitability greatly.

I wish you all good trading!

Timothy Morge

Swing Highs and Swing Lows: Are We There Yet?


Many traders count themselves amongst the legions of “swing traders,” entering long or short positions as price approaches potential swing highs or swing lows. Other traders are intraday scalpers and use swing highs or swing lows as formations to hide stop loss orders above or below, taking advantage of the build up of entry orders from swing traders at these regional extremes. But the question to both groups of traders is always the same: Are we there yet? Have we reached the buying zone or selling zone?



By definition, swing traders are always trying to sell rallies in a down trend and buy dips in an up trend. Then they can try to ride the “swing” or swings higher, running trailing stops that “box” in their profits as price moves in their favor.

But the peril is always the same: Has a recent rally within an established down trend finally reached an area where a top will form and price will then return to the major down trend—OR—Has price violated the down trend and a new up trend had begun? As a swing trader, you always run the risk of being “hit by the train” of a change in trend. Is there a way to better gauge whether price is running out of energy and is about to turn OR is likely to continue, running right through its likely stopping area?

I’ve done a tremendous amount of charting and statistical analysis over the past five years developing tools to keep me from “stepping in front of the train” of newly emerging trends. And one of the most useful ways I have found is to analyze the qualities of the price bars as they approach these likely turning points. The quality I am looking for I have named “Separation” and hopefully these charts and this description will help you successfully identify turning points and keep you from stepping in front of the trains! Let’s look at a chart:



In this example, price has climbed higher and I added in a down sloping pitchfork, or Median Line, to show me the potential path of price IF I have identified a swing high. But note that this upper red line has not been “tested” by price. To relate this term “tested” to trend lines, trend lines are generally drawn by connecting two prior highs or two prior lows. If you choose a prior high and then randomly pick a point in space, rather than draw the trend line by connecting it to another prior high, you get a line in space that has a slope that may or may not have meaning—you won’t know until it is tested. An untested Median Line has a bit more validity because of the mathematical relationship of the three alternating pivots used to draw it, but it becomes much more valid once it has been tested.



To make the analogy easier to understand, let’s turn the down sloping line into a simple trend line. And we’ll state up front that this trend line is drawn from two prior high pivots. Now we have an area where we think price MAY stop at, but WILL IT stop at this trend line?

Let’s think about what would make it stop at the trend line: Price has topped out twice at this area. This leads traders to feel it’s likely to follow the same pattern. So there may indeed be good orders to sell at or above this trend line, because price has stopped here before. One famous trading motto is: “Beat on a line that is working until it beats you”. If there are a good deal of traders waiting to sell at or above this trend line, price will test it and price will fail to go higher—and probably run a good bit lower in a short period of time as traders try to get short as it becomes obvious that a top is forming.


Now what would make price run higher through this line? If most traders are already short this market, either from the prior test of this trend line or from other areas, they may have a great deal of stops being worked in the market just above this trend line. If this is the case, once price tests and begins to violate this trend line, price will accelerate through this trend line very quickly and move higher.



If price approaches the trend line but does not test or violate it at all, I still won’t know if a top is in, because I won’t know if there are sell orders or stop buy orders above the trend line. Because price hasn’t yet “peeked” beyond the doorway, I don’t what is beyond it.



Here you can see that once price ran up above the trend line formed by prior highs, there were lots of stop loss buyers and these orders pushed prices much higher—and price closed well above the trend line that I originally wanted to get short against. The distance above the trend line that price moved is our first look at “Separation”. In this case, price closed with good separation above the trend line, which shows good buying interest. There is NO sign of weakness on this chart and no reason to attempt to pick a swing top.



In this example, price tested the trend line, ran a bit higher when some buy stops were hit and then suddenly found nothing but eager sellers waiting to get short as the buy stop orders disappeared. Note that price went well above the trend line but closed well below the trend line, which is also great “Separation,” but in this case it is down side separation and is a major sign of weakness.



Having the upper separation, even though the lower separation gives me the sign of weakness I wanted to see before trying to enter a short position, is important because it tells me price gave the buyers all the chance in the world to take control of this market and they failed to take control. And once the sellers took control, they ran price back down through the trend line and quite a bit more—Again, a sign a major weakness.



In this case, price barely peeked above the trend line, giving me no up side separation. Although price then traded quite a bit lower, I am not as confident about the test of the trend line, because there may still be nothing but buy stops waiting above the trend line. And as price turned lower, new short positions were probably added. But these new short positions do not have much profit in them and any turn back up to re-test the trend line may run into not only the original stop loss buy orders that have accumulated there, but may also run into additional stop loss orders because of the fresh new short positions from this recent move down.



Here you can see price climbed well above the trend line and did find enough sellers to push price back down to just below the trend line. So there is good up side separation but poor down side separation. This means that even though we found solid sellers once all the buy stops were run above the trend line, we did not find enough aggressive sellers to push price a good amount below the trend line—which would have been a sign of weakness. In this case, I am afraid of the old saying: “What was resistance is now support.” The new short positions established at or above the trend line do not have much profit in them and any move back above the trend line is likely to again provoke a fresh round of stop loss buying, pushing prices to new highs.



Let’s look again at an example with good upper separation and good lower separation. When both are present, we know price gave the buyers every chance to take control of the situation. But once the market ran out of buyers, fresh sellers came into the market and took control, pushing price back down through trend line and forcing it much lower, leaving good down side separation. Having separation above and below the market tells me that the area has been “well scouted” and the close of the bar tells me whether buyers or sellers were in control. In this case, the area was “well scouted” and the sellers were clearly in control when the bar closed. This is a sign of major weakness.



Once we have good upper and lower separation and price closes on an extreme, how can we enter the market? In this case, price closed near its lows and gave me a major sign of weakness after leaving good upper and lower separation. IF price re-approaches the trend line, I will get short as it approaches that area and my stop loss orders will go above the high that marks the upper separation. I expect to find sellers above the trend line because they so convincingly took control the last time price was above the trend line. So I expect the sell orders will act as a buffer, or protection, and I purposely hide my stop loss order above this recently made price formation. These orders should effectively keep me from being run over “by the train”.



Now let me simply put the slope back into the trend line. Again, we see great up side separation and great down side separation. And price closed near its lows. The sign of weakness is obvious and if price comes back up to the down sloping line, I would initiate a short position and my stop loss order would go above the top of the recently made high—just above the upper separation. I expect fresh sellers will emerge to help buffer any rise above this trend line, which will help protect my short position.




Other traders often ask me how to identify swing highs or lows “as they occur” and if my analysis is correct, at the end of the day, I’ll be able to look back at this peek above the trend line as swing high. And so as it unfolds, I refer to these potential extreme bars as “Pseudo” swing highs or lows. As you get more practice watching price action unfold in “real time” and learn to think several steps ahead as price tests these areas, you’ll begin to see more “Pseudo Swings” in real-time and that’s when you’ll begin to catch swing highs and swing lows and still do a good job missing being hit by the run away trains!

Good trading to you all!
Thursday, June 28, 2007
Tim Morge

Trading And Teaching: Parallel Lives

Traders on the internet, on my forums and at the various Traders Expos I speak at often ask why I teach seminars, write books and write articles and mentor traders. ‘Why would a professional trader with 36 years experience waste your time teaching—it just takes away from trading!’ is what I hear over and over.



The simple answer is that I find teaching is fulfilling. I find meeting other traders at the Traders Expos, whether they are just starting out or have been trading 40 years, is something that just makes me feel good. And I write because I like to write. I don’t do any of these activities to make money—I trade my own money and manage money for three large offshore funds and that’s my ‘profession’, but teaching and writing fills a need that trading doesn’t fill. Sometimes, when I least expect it, I learn something from those I am teaching to trade; and that’s a wonderful bonus. But teaching and writing is food for the soul to me.



And when I take a winning trade and then do a mentoring session a day or two later and watch a student going through their own trades with me one on one and they start diagramming out the same winning trade, it really makes me smile. I not only managed to make money on the trade, but I managed to teach someone else how to successfully read the market and use my techniques—and we BOTH made money on the same trade set up. That really is the ‘icing on the cake’.



Let me show you a recent example from the 30 Year U.S. Bond Futures:


Bond futures prices consolidate and then breaks higher, above the Swing High.


Bond futures were in a gentle up trend, making higher highs and high lows. Then they had a nice sell off before entering a trading range. Once price restored its energy by trading in the Energy Coil or congestion area, it broke to the up side and took out a Swing High. This was the first sign of strength since the sell off, so once price broke above the Swing High, I added in a blue up sloping Median Line and its Parallel Lines.




Bond prices climb steadily higher, easily breaking above the Median Line before pulling back.

Once price broke out of the Energy Coil or trading range, it traded straight up in an orderly fashion, easily breaking above the up sloping blue Median Line. But price had climbed about a full point without resting to restore its energy, so it was unable to hold above the up sloping Median Line. You can see that the last bar on the chart above zooms lower, through the up sloping Median Line, and closes on its lows with great down side separation—which is a sign of weakness.



When price breaks and closes below the up sloping Median Line, I added a red down sloping Median Line set.

When price zooms through the up sloping blue Median Line and closes on its low, I add a red down sloping Median Line and its Parallel Lines. You can see that price has already tested this new down sloping Upper Median Line Parallel, so I now have two sets of Median Lines on my chart—one up sloping and one down sloping—that have been tested. Though it sounds like it will only confuse the issue, instead it spawns areas where Lines of Opposing Force meet—and I call these areas Energy Points. My research has shown that these Energy Points can act as price attractors, giving me both a price target and in some sense, a good feel for the time it will take price to make it to any specific Energy Point; in other words, you know where price SHOULD go and how fast it SHOULD get there. Of course, price doesn’t always cooperate, but the probabilities once price starts heading for these areas is quite high, so they are quite useful.


Price leaves double bottoms but note that there is no price structure that will draw in natural buy orders where I can hide my stop orders.

You can see on the chart above that price did head down toward the area where the up sloping and down sloping Lines of Opposing Force met, but price drifted too far to the right [in time or space] to touch or interact with that Energy Point.



Instead, price tested the up sloping Lower Median Line Parallel and it closed nicely above it with great separation. This close is the first sign of strength since price broke back below the up sloping Median Line. But I could not consider simply buying Bond futures at this line, because there are no natural price structures [swing lows where other traders will have resting limit buy orders, for example] to hide my initial stop loss order below.



At the moment, I am left with a gorgeous chart. Price stopped where it was supposed to, leaving double bottoms, but there is no good trade entry set up.




Price tests the up sloping Median Line again and closes with good up side separation.

Four bars later, price tests the up sloping blue Lower Median Line again and it closes with good up side separation—which is again a sign of strength. Price is now making higher lows, so I can now use the prior test of the Lower Median Line Parallel as a Swing Low—because there should now be traders placing limit buy orders at that prior low—and I can hide my initial stop loss sell order below this Swing Low. Let me show you what I mean:


I want to buy a re-test of the up sloping Median Line. You can see my initial stop loss and profit targets diagrammed as well.


Now that I have a Swing Low to hide my initial stop loss below, I can use one of my favorite entry techniques: the ‘Test and Re-test’ entry. Price has just tested the up sloping Lower Median Line Parallel and if it comes back down to re-test it, I will be a limit buyer there, at 113 20/32. My initial stop loss will be three full ticks below the low of the first test of this up sloping Parallel Line, at 113 16/32. I’m risking four full ticks in the bonds, but what is a reasonable profit target?



I have two Median Line sets on this chart and at least for the moment, it’s not clear to me which one will act as resistance to price. Do I place my initial profit target at the down sloping red Upper Median Line Parallel or do I place it at the up sloping blue Median Line? Both targets offer me better than 2:1 risk reward ratios, so either would be acceptable. There isn’t a huge difference in price while I am diagramming out this trade, but remember that as price moves to the right, the difference between the two potential profit targets will get larger and larger. Is there a way for me to get a better feel for which line is more likely to work?




Note that I measure the undershoot from the down sloping Median Line and then transfer that same measurement above the down sloping Upper Median Line Parallel.

Note that I measured just how far price stopped above the down sloping red Median Line on its second test of the up sloping blue Lower Median Line Parallel—the area where I want to get long. Then I transferred that same distance above the red down sloping Upper Median Line Parallel. I added in red Sliding Parallels at both areas to make the measurement easy for you to see.



And now, right in front of me, is a new Energy Point that SHOULD act as a price attractor. It’s the area where two Lines of Opposing Force meet: The red down sloping Upper Sliding Parallel I just added in and the blue up sloping Median Line.



Are there any other clues?




Here are my limit buy orders, initial stop loss orders and profit orders mapped out for you.

Looking to the left, I notice that there is already a significant Swing High at the same area—and so I simply add in a horizontal blue line to mark the potential ‘Double Tops’ that might form IF price gets attracted to this area and runs out of energy.



You can see I have diagrammed my limit buy order, my initial stop loss order and now I have added my profit order at 114 06/32, at the Energy Point.



Now that I have settled on a profit target, I enter my limit buy order and my initial stop loss order. I can’t place a profit order until I have a position! Let’s see if the markets let me in:




Once price climbs higher with a large range bar, I move my initial stop to break even.

Price did come back to re-test the up sloping blue Lower Median Line Parallel, getting me long in the process. Once I check that my limit buy order has been filled at 113 20/32, I enter my limit sell order at the Energy Point at 114 06/32.



You can see that price spiked higher and at the close of the bar that got me long, I had a potential eight full ticks of profit in the bonds—and that’s too much money to let turn into a loser [$250 a contract]. I cancel my initial stop loss order at 113 16/32 and move it up to break even, at 113 20/32. I would move it higher, but there is no natural market structure to hide my stop below.



Price is dragged higher, right to the Energy Point at the Median Line and the prior Swing High. I exit my position at my limit sell profit order, taking a nice profit out of this Bond futures move.

You can see that price traded right to the Energy Point at 114 06/32, filling my profit order. Even though I use the areas where these Lines of Opposing Force meet in my trading day after day, I am still amazed when they act almost like an elevator, pulling price nearly vertical to an Energy Point. But I see Energy Points attract price in this fashion over and over again. Once you learn to identify them, they are wonderful sign posts in the markets to use when you trade, giving quality price and time projections.



I mentioned at the beginning of this article that ‘when I take a winning trade and then do a mentoring session a day or two later and watch a student going through their own trades with me one on one and they start diagramming out the same winning trade, it really makes me smile’. In this case, I had a mentoring session the very next day with a beginning trader that had had three prior one on one mentoring sessions with me and halfway through the session, he began to show me this same bond trade and my face broke into a broad grin. I didn’t interrupt him as he told me in great detail how he stalked the entry, how he carefully chose his initial stop loss area because there should be limit buy orders there that would act as protection for his stop loss order. To be honest, we chose different profit targets: he chose to put his profit order at the red down sloping Upper Median Line Parallel, partly because it was the more conservative of the two targets. And he did not ‘see’ the undershoot/overshoot that I used to draw in Sliding Parallels, so he didn’t have an Energy Coil on his charts where the two Lines of Opposing Force met.



But his entry was identical and his stop was picture perfect, hidden below the prior Swing Low to take advantage of the likely limit buy orders resting in that area. And although I squeezed a few more ticks out of the trade, I’ll bet he was more excited about his winning trade!



But I got the satisfaction of knowing that someone was now making money using the methods I taught him. And odd as it sounds, I probably got more satisfaction from him seeing and executing that winning trade than I got when I made the same winning trade the day before.





"Master your tools, Master Your Self." ®

I wish you all good trading.

Timothy Morge