Trading Trending Markets using Median Lines
Summary: John Lynch
KIWITRADER Aug 2001
back to Tim Morge
I always try to take trades with good trade location. If I can't
get a trade location that's ideal, I generally pass on the trade. If
I do take a trade with trade location that is acceptable, but not as
ideal as I originally planned, I trade with less leverage. I never
take trades where I can't define both the stop area that is
acceptable and at least one area that is a good logical profit
objective. Never chase
price. There will always be another trade setup. When I am
not in rhythm with the market, I don't trade. Forcing trades is one
of the worst sins. Time
invested in trades is expensive. If a trade is becoming stale and
not progressing as I thought it would when I put the position on,
it's best to go flat.
Being flat can be a much
more creative state of mind,
and stale trades just tie up your capital and your mind.
Finally, If I don't feel good, I don't trade. And I mean
emotionally good, physically good-any distractions mean that I am not at my very
best. And to trade these markets day in and day out, I have to be ready, with
good tools and a good mind.
It Can ALL Start with One Simple Line
When drawing MLs don't assume these price levels will be
respected, but wait for evidence that the lines I'm looking at are being proven
by price action, before I consider initiating a trade.
80% of the time the price will reach the median line when using ABC on major
Signs of strength include gaps, large range bars,
zooms thru the median line. Other shows of strength: Price tests the Lower ML of
an up sloping Median line and then begins trading up and has no trouble running
through the Median line--if it doesn't immediately retrace back to the Median
line, it's going to the Upper Median line. The probability is 80 percent once
it's closed above the Median line for the third day.
When price is reaching up to test a median line,
failure to reach it is a sign of weakness.
This indicates it will approach the lower line (and overshoot it by the
amount it missed the upper line).
When Trend has been established buy and sell at Median
Lines. Buy when price briefly touches the support of the up-sloping median line.
Tim chooses to limit in but you can stop in if you want.
Entry targets with 10% of ML/MLH range allowed for
failure to reach it.
When the median line is zoomed then buy the retest.
If it reaches the UML and then falls back to the ML
buy at the ML.
Enter trades at a price of your choosing, when
possible, which means when you see a trade that you identify that has several
degrees of confluence you usually have limit orders in the market before price
even gets to those areas. Confluence of a minor median line and fib retracements
give a good entry.
Don't wait for a bounce or reversal to get in. I like
to have good trade location. Having good trade location can cover many sins.
When that isn't possible, I'll have a stop order working below or above the
market to stop me into the market with smaller size, at least on trades that I
feel are high probability trades. If I can't enter with good trade location, I
usually reduce position size.
When price makes a big run, begin thinking that either a retracement is due OR
that price will begin to coil
Not looking for king hits.
Take easy trades for acceptable higher probability profits.
You may take multiple exits (say 61.8%, ML intersection and trend
Stop at the prior minor pivot low (3 ticks under).
Profit target just under current median line intersection. When you have
a nice profit and donít want to give it back you can move stop up to just
below the prior swing high.
Tims 3 ticks on the s&p = .75 vs bar range of 3-5
= 1/6-1/4 bar.
First, remember that that slide presentation used only the
basic Median Line for trade selection and techniques. The measuring technique I
showed there is extremely simple but is also very powerful. Most traders don't
take the time to orient themselves by noting where the intersections with the
Median Line and MLHs are. This also points out the thought process of trying to
anticipate price movement and so plan for potential moves.
The placement of stop and profit orders is an art.
But let me make some generalizations about what I do when trading my own
I always use stop orders and I enter those at the same time I place the
orders to enter the market.
I rarely snug my stops to break even just to move them to break even.
Instead, I look for areas that I consider to be natural support or resistance. I
then place my stops close to those areas, utilizing the "protection"
these areas may give. If you read my commentaries, you'll see all sorts of
different bar patterns, lines, patterns, etc that I use for this purpose. As I
said, its an art.
I also always have profit objectives in hand before I enter
the trade. I like pre-defined trades.
How do you manage a trade like this if price approaches
your objective but falls short, then starts to rally back against you?
Certainly if it moves in my favor and then starts to
rally abruptly 10, 12, 15 handles against my short I'm stripping off contracts
on that rally; on the other hand as it approaches my objective and I see
structure (swing tops) or retracement levels to lean against I start lowering
stops to lock in profits above these points of resistance.
How do you
decide how big your target should be? I
think the difference lies in how I see markets in terms of expressions of
energy: "spent energy" vs. "stored energy". The first trade
came right after the market had been in a trading range and had stored energy in
the coiling range (A-to-Y on the first chart). The second trade came after the
market had spent a great deal of energy (Y-to-C) and had little or no motion
that would indicate it was re-storing energy. Once price tested the lower
down-sloping ML, there was a strong rally. The price action appeared to act more
like a two-way trading range day as opposed to a one-way trend day. I decided to
emphasize taking quick profits, especially if price was unable to break below
the early morning low of 1098.50 at C.
I always have a stop in place. I usually start with a
disaster stop. I rarely risk more than 2 percent of capital on a position and
that disaster stop is rarely hit. I like to take money off of the table and once
trades become profitable and I have some time invested in them, I am careful to
keep the trades from turning into losses.
If I violate my trading rules, I
always take a minimum of three trading days away from the markets--to clear my
mind. I would always rather under-leverage than over-leverage.
The trick to trading this "rolling chop"? Know
before you initiate a trade there will be these rallies (such as at G, I, K
& O) and so look to lock in profits on the sell-offs (such as at H, J, L, N
& P). Only sell into resistance-never chase the market lower. And use lower
leverage, so that if you do get out of step with the market in this dance up and
down, you can survive a test of at least one prior swing high.