Idealized Trading the DIA for Aug 23

Aug 23, 2007: 8:05 PM CST

I wanted to create a new series on the Afraid to Trade.com blog, entitled “Idealized Trades of the Day.”

What I am attempting to accomplish is to highlight the most ‘perfect’ trade setups – whether resulting in a profit or loss – based on my system and interpretation of intraday market action, in order to enhance not only my own trading, but to help give insight to other traders to provide a fresh way of viewing intraday price action. I frequently print off various charts and highlight ideal entry and stop points by hand, and am attempting to convert this process to charts, and will be showing the results to readers.

Caveats:

There is no way possible I could analyze or highlight all available information during the trading day, especially regarding news events, announcements, etc. Also, I can not address every technical indicator possible. Although I view other indicators and sources through the day for my intraday trading, I will be discussing those only in passing with these posts. I will not be showing higher timeframes, TICK or TRIN values, volume readings, $VIX readings, sector ETF readings, and the like.

Unless otherwise noted, I will only be utilizing the DIA ETF – Dow Jones Exchange Traded Fund – for the setups. The lower pane indicator is the LBR 3/10 Oscillator, used to highlight trend (red line) and momentum readings (in terms of new momentum highs or lows and divergences).

I am using the 20 (green) and 50 (blue) period exponential moving averages, and the 200 simple moving average (red).

The dotted lines are the day’s “Pivot Points,” calculated by standard formula. If discussed, I will indicate which line to which I am referring.

I will begin with simple analysis in the first posts, and may expand analysis as time progresses.

I will post the day’s chart, using TradeStation, and will explain my thoughts and why I consider each sequentially numbered setup “ideal” beneath the chart.

Numbers on the chart may not always represent trades – they may represent exit points (or achieved profit targets). I will be rounding entry and exit prices for simplicity sake.

Let’s begin with August 23, 2007, DIA:

  1. “Fade the Gap”. Because the Dow gapped up, the first play of the day is to fade the gap. When price fell beneath the Day’s R1 pivot, this created the confirmation needed for a short trade. The target, $132.20, was achieved quickly with ease. Entry: $132.68. Exit @ Profit: $132.20. Gain: $0.48

     

  2. “Impulse Buy” trade and “Moving Average Test”. New Momentum High results in a trade setup to test the most recent high. In combination, we have ‘support’ from the rising 20 period moving average. Target: R1 Pivot.

    Entry near $132.35, Target $132.68… not achieved fully. Exit near $132.60. Profit: $0.25    

     

  3. Represents “Profit Target” and could be an aggressive ‘short’ trade targeting either the 20 or 50 moving average. I do not note it as an ‘ideal trade’ here.

     

  4. “Support Buy” After a swing down, we are looking for a ‘swing up’ in price, and hope to find it at the 50 period moving average. One could have also waited for a test of the “Daily Pivot” at $132.00. Both trades – even though ideal – resulted in a stop-loss. The stop would have cost anywhere from $0.15 to $0.30, depending on your strategy for placing stops.

     

  5. Represents possible “short” trade with tight stop above either the daily pivot or the moving averages

     

  6. Represents a “second entry” into the same ideal trade set-up Both have entry near $132 and target #1 as the Daily S1 Pivot or the rising 200 period moving average. Both trades would have achieved their objective.

     

  7. Entry short: $132.00 and target (achieved) at $132.62… which was also the exact low of the day. Profit: $0.38

     

  8. “Support Buy” and “Momentum Buy Divergence” trade. Momentum divergence occurs from the 3/10 oscillator, and the ‘dual support’ zone occurs from the 200 period MA and the daily S1.

    Target, Daily Pivot (or moving averages) near $132. Profit: $0.38.

     

  9. “Support Buy” and “Momentum Buy Divergence”. Price fell to the rising 200 period MA, which can be expected to be support. As an added bonus, we observe a slight positive momentum divergence. Target: Moving average resistance, daily pivot, and $132 ’round number’ resistance. Target achieved and exceeded. Profit: $0.20 (ultimately had greater follow-through, beyond the initial target)

     

  10. This point represents the ‘target’ for the trade taken at #9

     

  11. “Super Buy” occurring from the rising 20 period MA, rising 50 period MA, and the daily support below. Price faltered slightly below the daily pivot, but then recovered. The profit target was the most recently formed ‘swing high’ at near $132.30 which was achieved very rapidly after entry. Profit: $0.20 to $0.30

Summary: Not every ‘ideal’ trade can result in a profit, but more than not, they will, which leads to an overall profitable system (especially when stops are small when compared to gains).

Remember, the ‘ideal analysis’ above can also be used on the @YM Dow-Mini futures, or it could be used as a ‘guide’ to leverage your favorite stocks when the overall index gives an ideal buy or sell trade. Often you will get more follow-through (more profits) by utilizing a leading (or lagging) stock to carry out your thoughts or interpretation of the overall market’s movement.

 

 

 

 

 

8 Comments

8 Responses to “Idealized Trading the DIA for Aug 23”

  1. Glyn Says:

    Hi Corey,
    Really new to this so please forgive the stupid questions. When trading I assume the software tools you use illustrate the real time positions of your moving averages? I guess then, that if you see a bootom/bounce of these averages, and the colour of the candle is psoitive you act on an upward move? In reverse I assume that is what happened at point 6 but (I may be way off here) thats where I’m confused as the candle (I think) being clear sugggests and upward move but you short ? I’m probably misunderstanding completly but your feedback would be welcomed.

  2. Corey Rosenbloom Says:

    Glyn, Thank you for your question and for allowing me to add clarity.

    True, TradeStation updates the moving averages to the second, and the direction of the slope and the closeness of price to the moving average is what matters. I am big on support and resistance from moving averages, and either use them as pure decisions or as confirmation/non-confirmation. I think a lot of people view these same averages and act upon them, creating moves. They’re not perfect, of course, but they provide objective targets and entries.

    A lot of people utilize candlestick analysis and I do as well, but I frequently don’t make a decision based on the color. What’s important is the “Level” or zone price has reached and your aggressiveness.

    Observe point 5 indicating a short trade. You could have easily taken the short trade ‘early’ when the previous white candle tested the daily pivot. This would have been aggressive because price may have continued through. A more conservative approach would be to wait indeed for a red candle, which is indicated at point 5… but price tested the daily Pivot level five times at points 5 and 6, meaning there was a true battle between buyers and sellers at these zones, where people who don’t use pivot points may have been confused why price was ‘bobbling’ so strangely at these levels. I indicate point 6 just as a second entry if you missed the first test. I actually probably should have placed the down arrow over either of the red bars, but what’s important is that odds favor a reversal of price at this level due to the falling moving averages and the daily pivot. Price may not reverse and go down there, but if it continues upwards and breaks through, your stop would be placed very close to your entry and just above the moving averages, resulting in a small loss compared to a larger profit target.

    In the case at #5 and #6, your stop would have been around 15 cents while your profit target would have been 30 cents, resulting in a 2 to 1 reward to risk ratio which is often ideal in intraday trading. In other words, if half your trades fail (are stopped out) with this type of risk/reward ratio, you will make money on balance.

  3. dan Says:

    Hey Corey –
    Which indicator are you using to measure volume on the bottom section of your chart?

    thanks,
    Dan

  4. John Says:

    Hi Corey,

    Great stuff. Really enjoy your site. . Could you tell me what software you use to track the intraday TICK/TRIN? I use QuoteTracker but it does not allow it since I have TD Ameritrade and they don’t support it. Go figure.. Also, have you read John Carter’s “Mastering the Trade” book. .He also has a lot of references to “fading the gap”.

    Thanks, John

  5. Corey Rosenbloom Says:

    Dan, thank you for your comment.

    I’m actually not showing volume because of lack of space on the chart. I do view volume through the day and use an indicator called “color volume” from TradeStation.

    The blue wavy line indicator is the custom LBR 3/10 oscillator, and is a momentum indicator. I am not showing any volume on the above chart… to me volume is a confirming indicator, and I do not often make trading decisions off volume.

  6. Corey Rosenbloom Says:

    John, thank you for your commend and your support.

    TradeStation allows me to track the TICK and TRIN daily, and I use a 5-minute line chart of both and have alerts typically at +800 and -800 on the TICK, and follow only the ‘trend’ of the TRIN.

    In TradeStation, you simply type the symbols $TICK and $TRIN into a chart and then customize it. I have mine in the left corner of my screen, along with the $TIKI and a radarscreen of the up volume vs down volume ($UVOL and $DVOL).

    I am unaware of where to locate these readings intraday on another platform. I don’t know of any website that offers the data up to the minute free of charge. I would ask any readers to comment here if they know of a location.

    In Carter’s work “Mastering the Trade,” Carter describes the classic yet effective strategy of fading the gap, yet he uses more parameters and adds specific rules to it. For me, the first play after a relatively close gap is to “fade” it and then play off the impulse that occurs in the direction of the original gap when filled. This creates two trades right off the bat that have high odds of success. Carter explains the pattern in far more detail. “Fading the Gap” is a classic strategy used by a large number of traders… which is probably why it seems to work.

    By the way, I’ve heard John Carter speak at conferences and he’s a great speaker. Very educational. He utilizes simple yet effective concepts.

    Thanks,

    Corey

  7. Dan Says:

    Thanks Corey. For stockcharts.com would that be equivalent to the Chaikin Money Flow Oscillator?

  8. Corey Rosenbloom Says:

    Dan,

    No, actually the LBR 3/10 Oscillator is viewed in StockCharts or any other platform by adjusting the default settings for the regular MACD indicator. Change the MACD settings to 3, 10, 16, for a (3 period MA, 10 period MA, and a 16 period lookback period).

    THE 3/10 Oscillator is nothing more than a ‘sped up’ MACD indicator.

    I display it in StockCharts posts whenever I use a graphic from there.