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 September 26, 2004 Commentary (weekend
edition)-
Today I'm going to revisit what is, perhaps,
my favorite issue to discuss, the ES. I've made an effort to mix it up lately
and steer away from the mini, so I feel I owe it to myself to discuss that
today. I'm going to show an example that doesn't particularly 'work out' all
that well, but by applying my methodology and discretion, I'm able to take what
probably would have been a loser for many traders and turn it into potentially
two small winners.
The pickings have been fairly slim in the ES lately,
with a lot of fake-outs from all the program trading. The latest program stats
show that the level is at just about 60%, and has been running well into the
50s for quite awhile. It's just the way it is, and we have to live with it. It
has me on the alert at all times, though, and definitely leaves me totally
exhausted if I try to trade the ES straight through, from bell to bell.
In 'the old
days' I could trade 'wire to wire' like it was nothing, and I was disappointed
when it was over for the day. I think it takes a lot more concentration and
energy for me to watch endlessly as nothing much happens except programs
jerking things all over the chart. If I take a break, I may miss one of the
small number of chances the market gives me per day.
I was
watching the ES Thursday as one of my favorite setups started to come together,
an ABCD pattern, set up to continue the trend. Let me mention right now, before
I go any further, that if you expect to understand all of what I'm doing here,
from the exact details of the techniques, to how and why I filter trades as I
do, to where and when I take trades off, without having read all the books, you
are fooling yourself.
I write these commentaries up partially for
people new to my work to see if they like the overall concept of what I do, and
then if they do, they can go ahead and buy the books. And I write the
commentaries so that the previous book buyers can see examples, and they can
look them over, in the 'context' of their own 'Trading Plans' and the knowledge
that they now have, to show them things that I see that have some significance
to the process.
I know I've said this before, and I want it to be clear that
everyone is welcome to read this free commentary, but if you are trying to
'figure out' what I do from this commentary you are going to do yourself a
serious disservice. There is just no way I could, or would, try to explain
what's in now six books and two articles, in a small column like this. I keep
repeating this because I get the impression that there are a fair number of
people trying to do just that, and that worries me. There is just no way the
gist of my methodology can be garnered just from this column.
With all that
rambling done, let's move on. I spotted a potential ABCD pattern on the
3-minute ES chart. Let me show that now.
As the ES approached the potential trade area
(PTA), I dropped down to a 1-minute chart to look for entry. I also watch the
tick charts very closely. Many, many people who haven't read my books (and a
few who have) still argue that they like my methodology, but they'll stick to
'fading' in on the entry.
For those that don't quite understand what I mean here,
they simply enter right at the PTA, in this case as soon as a trade prints
1110.75. It doesn't matter how fast it's going up, what the price action is
like, the volume, anything. If it hits the PTA the trade is triggered. I wrote
an entire book explaining why
I don't do that except under rare circumstances, and showing many variations of
what I do.
I go through all the discussions on how I don't usually
get as good of a price as with a 'fade' entry, but I feel my percentages go way
up. When I weigh it all up, and crunch the numbers as best as one can as a
discretionary trader, I find the entry techniques I use are, net overall, a way
better way for me to go. That may not be the case for anyone else. I can only
speak for what I think, for my trading.
Let's see
what happened at 1110.75 from here.
This is why I don't 'fade in'. Down on the
1-minute chart there was a slight reaction to the grouping, but not enough to
trigger me into a trade. This immediately got me thinking, as I sat with my
finger on the sell button. If this grouping was violated, a pattern violation
trade might be setting up.
Let's go down to the 1-minute timeframe, and I'll show
what I did.
After the slight reaction off the grouping
the ES built up some steam and had a clear violation look to me. I was watching
T&S, volume, the SOX, and so on. The pullback and reversal was a setup to
launch a take out of the grouping. If you have tick charts, take a look and see
what it all looked like as this unfolded.
The arrow points to where I would
have got in if I was trading this strictly using the 1-minute chart for entry.
I jumped the gun a bit on this one, using even lower timeframes, because I felt
that I could 'see' what was happening. The ES then went up a bit, and quit. I
started some scaling. 'Normally' I wouldn't even be thinking about scaling out
after just less than two points. But nowadays the ES snaps back so often I've
been experimenting with some initial take-offs in the 5-8 tick range.
I closed out
the rest on the latter pullback, and walked away with a little. I then saw that
pullback start to stabilize and 'test' the grouping from above (I actually had
three groupings on my working chart, based on what I show in Kane Trading on: Trading ABCD
Patterns, but that's too much for this short commentary), and I looked
for a long 're-entry'. I got one, and the ES did about the same thing.
I scaled out
of some, and the ES rolled over and I closed the rest. Another small winner,
but nothing much to speak of. (I tried to call all of this live in the chat
room as best as I could, but things were moving pretty quickly.) Now, here's my
point. If I faded the short at the grouping I would have had a full stop out,
and surely would have been sitting there, frustrated. I seriously doubt I would
have 'flipped' to the long side, and even if I were thinking that way, my entry
point would have been terrible for me.
By waiting and watching the price action and
following my methodology, I decided on another possible course of action. This
led to two very nominal winners (nominal because the setups were for 'intraday
swing trades' based on the 3-minute chart, with the 13-minute chart for
'context'), instead of one full stop out loser. As I've said many times, if I
can just scratch and have very small winners and losers, I'll play that game
all day, just waiting to hit one.
This is just my opinion, but if you think you
can 'tell' which setups are going to run and which aren't, in the midst of 60%,
and even over 70%, program trading, you need to take serious stock of your
situation. You're either truly precognitive (in which case you should give up
trading and buy some lottery tickets instead), or truly fooling yourself. I go
back to my poker analogy from the February 5,
2004 commentary. I just check and fold, until I hit one. That's my
style.
Let's finish with a look at what the ES did from here.
The ES spent a lot of time chopping around
just above the grouping. Now, do you think that I felt that a violation of that
grouping to the downside would have some continuation? You know that was one of
the things I was watching for. Would I have traded it as a breakout trade?
That's a silly question. I don't think there are too many silly questions, but
that would be one.
I try to position myself ahead, if possible. If it's not
possible, I just pass. Sometimes it takes me a few tries, but that's just fine,
as long as I can position such that the stop is small, and such that I can
usually start to scale out on a high probability first thrust, and then get the
stop moved. As I said, that's a game I'll play all day long if I can.
One
additional note before we quit. GOOG is still going, and I scaled out of some
more on that last thrust up. I'm still holding a very small portion, but after
that wicked sell-off, it sure is acting done. You never can tell with GOOG,
though. And I'm still watching gold, as it creeps towards the setup area. I'll
update that, as it gets closer.
The next commentary will be the mid-week
edition, posted by Wednesday.
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