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Trading notes 06/24/11
As a continuation on the teaching of how to manage the entries for the
Phase-4 Flow Exercises I wanted to start to show some of the alternate
ways to work the exercise and some of its practical uses for trading. I will
include a couple charts but brace yourself for a bit longer post.
You may recall if you started the Flow Exercises that Phase-4 never ends.
If you have not started and are a member then there is no time like the
present so get started. Anyhow, since that exercise never ends it is
important to keep it interesting and useful and dynamic so that you will
continue to build upon what you have already learned as well as continue
to sharpen your instincts, improve your recognition and shorten the
duration it takes to make the correct decision based upon what you are
seeing.
Today I will re-introduce how to use the bigger channel discussed in the
trading room bulletin with these exercises. This is a larger channel so it is
best to have a panned out view and defocus the detail so you can just work
off the patterns. Get with me if you need the settings again. The basic
exercise again is like this: First you combine what you did in Phase-2 with
identifying the peaks and look for the initial breaks to new directions
through the HL or LH formed before the weaker last push in a direction. It is
that break of the HL or LH that will distinguish the deeper pullbacks that
happen to pop the channel but are not usually an end to a move. See the
green circles versus the red circle in this first chart. Once a pop and break
of a swing are in place then its the normal entry off a pullback to the
channel or the middle of the channel and using a minimum stop of outside
the opposite channel. Ideally the stop will get beyond a significant swing
high or low. For instance if the direction is changing then the stop should
go beyond the high or low made prior to the initial change with enough
room to survive a test of that high or low. If it is a continuation play of the
same trending direction the minimum stop is acceptable. Remember also
that the channel is just math. It is not real and the market does not
recognize it at all so the main focus is still on normal pullbacks that make
sense when considered as part of the extension preceding it. They will
typically come back and test swings, or congested areas, or pullback to a
decent depth. In stronger moves pullbacks will be less deep but last for a
normal duration. What is normal will depend on the personality of the
market driving it and that is something you should watch already having
worked through the initial exercises. Let me know if you need help with that
part.
The chart linked above shows the normal 3-5 peaks of the same scale and
with the last one being weak near a crunchy and preceding a change in
direction with the ideal entry marked. This is a really simple and easy
one-chart method with minimal filtering. It gives you a quick view and is
handy for limited trading schedules around jobs because it can be done on
very fast time frames and used for consistent quick scalps. It is enhanced
with volume or price by volume charts. Due to the panned out view the
higher time frame is already incorporated in the chart and is not really
needed much. I will go over that in detail in the next post.
One of practical applications of using the exercise for a timing method
besides short-term scalping is to manage longer-term retirement funds by
timing transfers in mutual funds or hedging them with longer-term options. I
manage most of my family's retirement plans this way by changing between
index funds and money-market type funds or using inverse leveraged
ETF's for the sell side plays and getting back into the index funds when it
cycles back to buys. It kept us flat during most of the down cycles in the
last 10-years and while not pinpoint accurate at timing the up cycles it gets
in near enough to the changes in directions to make it worth the effort.
Here is a broad stroke look at how that looks on a chart.
I encourage you to stick with those Phase-4 flow exercises. Change things
up with alterations like the one mentioned above and get with me for more
ideas on how to handle those. I will show you my routine if needed we can
get together in the evenings and walk it out on live Forex charts. Have a
great week and be sure to ask for help when you need it.
God bless you ~
Here is the prior post.
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