[steve46]

I'd like to offer a few ideas for trader who may be struggling or simply not seeing the market as well as they could

First one needs to see the market in a context. For this I use daily charts
and to frame the action, I use a 200 period EMA (White line) and a shorter 80 period EMA (Blue line).

If I can see an area where the market has shown major support in past I locate it using a horizontal line as shown at the bottom of that chart

While I do use this primarily to frame price movement, I would have taken a short trade off the test of the 200 period EMA.

[steve46]

This chart with daily candles, shows more recent action with the addition of the monthly pivots.

In my opinion, an important concept in trading is that of "tests". Price is always testing some landmark or "line in the sand" and one of the challenges is to find out which of these "lines in the sand" is significant.

What we can observe here is that recently (8-11-08) price tested an area where two (2) "landmarks" exist close together (the monthly pivot and the 80 period EMA). In my experience, trades taken off tests of areas where two or more such elements exist together offer improved odds of success.

A swing trade taken off the test of the 80 period EMA at 1313.50 or off of the test of the monthly pivot at 1307.50 would have had good success with a low to date of 1274.

A short term or daytrade taken from the test point at 1313 and held to EOD would have reached a low of 1288 and a profit of 25 ES points.

[steve46]

Since we are talking about "seeing" the markets I will begin by suggesting that struggling traders try using constant volume bars (or candles). For the ES market I favor three charts, 10,000V, 2401V and 800V....each chart offers a different "resolution" to market action.

Here I show a recent chart using 10,000V candles

First notice that I annotate the Nikkei open. What I want to know is "What does Asia want to do, mark it up, down or consolidate?" Then I annotate the approximate open of the DAX, and again I want to make note of how it acts (what its effect is on the Globex market). Of course one could also simply get the charts for these markets, but this way one sees the "effect" of other markets on the Globex. In this chart we see the effect of both markets conjointly. Clearly they are going to take the market up and as the evening wears on, we see higher lows formed (HL symbol).

As the US Market opens, I always wait for 4 candles to complete before making a decision. I believe this gives me some idea of the direction of the market's "first move". In this instance a quickly drawn trendline helps to make the decision. Where I show the word "entries" what I notice is that price tests the trendline and respects it (once). In my opinion entry on the test is aggressive (not high percentage) but entry on the open of the next bar with a tight stoploss is a higher percentage move. That entry at 1299 would have offered a 3 point profit before violating the trendline. What follows is a retest of the trendline which forms a lower high and offers several favorable short entries.

Frankly the short entries are a reflection of the trader's ability to recognize changes in momentum. Obviously the "failure" candle is hardest to recognize, but the short tail of the next candle should tell you that the odds are in your favor, and the next candle really confirms it. Short entry in this area (1299.25) provides favorable position and results in a nice potential profit.

Although the subject of position sizing is complex, I suggest that a trader not trade small accounts. Instead I would wait until I could trade at least 4 units (with a minimum 20,000 USD) acccount. I would suggest scaling out one (1) unit each at 3, 5, and 10 points, leaving one unit to run. For this market and current volatility I would use a 2 point stop. I would not trade this market with one unit.

[steve46]

In this next post we show the balance of the 10,000V chart for that day (8-15-2008)

What happens is that price continues to consolidate and test the 200 period EMA. When this happens we take notice of the relative position of the 80 period EMA. Notice that both are approximately horizontal. We expect consolidation to continue and we look for long entries (because the 80 period is above the 200). Entries upon retest of the 200 EMA proved profitable in this chart. The first entry at 1294.75 resulted in a profit of at least three points if you scaled out as I recommend. The second entry was at 1295 and took heat down to 1294. This trade would have resulted in a five point profit, scaling out at three and five points (if exiting at 1300).

[steve46]

Here is an example chart of the same open using 2401V candles.

Note the open of the Nikkei and the resulting move up..somewhat later the DAX opens and moves up. There is a retacement but ultimately the market forms a series of higher lows prior to the open at 9:30 EST (Market Open).

Notice the test of the 200 period EMA (where it says "Higher Low" during premarket) and the relative position of the 80 period (blue) EMA. Notice that price then creates a higher low but never really tests the 200 again. This indicates strength. The market opens and tests the 80 period EMA and the long entry is obvious.

[steve46]

and finally we have a chart using 800V candles

On this chart, because the data is spread out a bit more, it is not possible to see much of the premarket. We assume one would review and monitor that movement using one of the other charts.

The nice thing about this chart is that it shows tests of the 200 and 80 period EMAs very clearly. Again we see the relative position of the 80 above the 200. High probability entries (long) happen when the 80 period moves from below the 200 to above just prior to the test and vice versa. Once that happens we look for the test and take the trade.

As one can see there is an advantage to using several of these charts concurrently. If for example the trader misses an entry on the 10,000V chart, often there is another chance to enter by switching to the next "level".

One important comment at this point. Although it seems easy in hindsight, I think the primary challenge for a struggling trader is controlling the urge to act impulsively. One has to wait for the setup and not "improvise". This takes a lot of screen time and practice.

[daedalus]

Great posts steve! The 200ema and 80ema's can be powerful support and resistance tools.

[brownsfan019]

Originally Posted by steve46 »

One important comment at this point. Although it seems easy in hindsight, I think the primary challenge for a struggling trader is controlling the urge to act impulsively. One has to wait for the setup and not "improvise". This takes a lot of screen time and practice.

Ain't that the truth.