[DbPhoenix]

Like the "Cajas Famosas", hinges are a type of springboard. But they by definition are not boxes. Rather than diffuse the focus of the boxes thread, I've created this thread to address hinges per se.

To launch the thread, I've posted a chart of the most recent Dow hinge:

Perhaps the most attractive feature of the hinge is that it's so easy to recognize in real time. Further discussion of springboards and hinges may be found here.

[atto]

Since hinges are very easy to spot real time, and they occur rather frequently, I wanted to examine some "failed" hinges, and how we can protect ourselves.

Here's an example. The market and timeframe don't matter (assume this encompasses a larger sized move). This hinge occurred in a longer term downtrend. I mark midpoints for hinges, because they frequently are tested again and can act later as supply or demand areas. As you see, price broke out of the hinge to the upside and went higher than the past two bull traverses. However, bullish interest soon died, and price returned back down, broke the midpoint, and continued down.

I've noticed that this occurs somewhat often. In this case, I was stopped twice (entered on the break, stopped soon; entered on midpoint test where it momentarily bounced; stopped) before the break down below the midpoint (I prefer rather small stops, and don't mind re-entering). It must be noted, however, that the pattern did indicate a large market movement.

How do you handle these? Was these a warning sign here? At what point is a hinge "invalid"?

[DbPhoenix]

This is not a "failed" hinge. A failed hinge is one beyond which there is no directed move, i.e., one that trails off into a patternless sideways nonmove to nowhere. In your example, you had a poke to test for buying interest. There wasn't any. Therefore, it is not surprising that the sellside would take over (if it didn't, then you'd have a patternless sideways nonmove).

As for a warning, I have Teresa Lo's admonition imprinted on my brain: "if it doesn't move, you don't want to be there". In this case, the move was aborted immediately, Therefore, you don't hang around and hope for the best.

As for a midpoint bounce, I don't see one. Perhaps you're placing your buystop in the wrong place.

[firewalker]

Originally Posted by DbPhoenix »

Like the "Cajas Famosas", hinges are a type of springboard. But they by definition are not boxes. Rather than diffuse the focus of the boxes thread, I've created this thread to address hinges per se.

I believe you said somewhere that the target of the breakout would be the extreme point of the hinge. So in case the low, since we broke to the downside. Despite the $INDU chart on StockCharts showing differently (and the one on Bigcharts too), we opened yesterday with a spike down below 8000.

So if I understand correctly, the target would (more or less) already be reached?

[DbPhoenix]

Originally Posted by firewalker »

I believe you said somewhere that the target of the breakout would be the extreme point of the hinge.

I don't recall saying that. If that were the target, the trade would hardly be worth taking.

[jaygo]

So how would one manage this trade then DB? (looking at attos chart) If price fails to break north i would just get stopped out and move onto the next setup. I always assumed that what i was looking at just wasnt a hinge. If this were to happen would the most logical entry be on the break of the mid point or perhaps the demand line? Even if i didnt trade the hinge the failure to break north gives a pretty good clue to where price is heading which is always helpful.imo

[DbPhoenix]

Originally Posted by jaygo »

So how would one manage this trade then DB? (looking at attos chart) If price fails to break north i would just get stopped out and move onto the next setup. I always assumed that what i was looking at just wasnt a hinge. If this were to happen would the most logical entry be on the break of the mid point or perhaps the demand line? Even if i didnt trade the hinge the failure to break north gives a pretty good clue to where price is heading which is always helpful.imo

Genuine hinges share common characteristics (see the link I provided in the first post) and can therefore be traded in much the same way. If buying what appears in real time to be an upside breakout through the supply line, keep a tight stop. If it doesn't go, you're out at breakeven. If price returns to the midpoint, one can place a buystop above this activity so that one can be stopped in on a second attempt at an advance. Otherwise, one can as you suggest sell a break of the demand line, again with a tight stop. If he is again stopped out but the return to the midpoint turns out to be a test, he can place a sellstop below this test and be stopped in on a second attempt at a decline.

I don't know what bar interval was used in this case, but using a smaller one may tell you whether or not your trade is going to succeed without having to wait for a "bar" to "close".

[firewalker]

Originally Posted by DbPhoenix »

I don't recall saying that. If that were the target, the trade would hardly be worth taking.

I agree one would expect a more prolonged directional move, but I thought you didn't "calculate" targets nor used PnF charts to determine targets, but just went along with what the market told you... so what would be the target then?

Anyhow, I couldn't find the exact post that I had in mind, but it was something you talked about in March/April when the NQ broke out of the hinge it found itself in at that time, see also here.

Perhaps we could use that as an example where price didn't move very far (at least not in terms of size relative to the hinge itself), and only tested the bottoms of the hinge before preparing a new advance in the opposite direction.