Idealized Trading – August 25th

Aug 27, 2007: 7:04 PM CST

Today’s intraday Dow Jones ETF action was less than stellar according to my strategies, as you’re about to see. Trade setups were in small supply, and endured a ‘rinse’ or ‘wash’ prior to achieving their target.

Let’s look at the ‘ideal’ setups for the day on the 5-minute DIA chart:

In the morning, there was consolidation and ‘flatline’ action which leads me to want to play the first trade as a breakout trade. The falling 20 period moving average and Daily Pivot (blue line) served as interim support and resistance, and we can anticipate a breakout in either direction, but we can’t be sure which one, so it’s best to let the market ‘tip its hand.’

We get a little hint from a developing and significant positive momentum divergence that resulted in an upside breakout from consolidation. This led to the first ideal set-up of the day:

1. Breakout Trade with Positive Buy Divergence

  • Entry as price breaks above the 20 and 50 MA. Entry around $133.30. Stop below the day’s pivot. Price ‘rinsed’ downward, adding heat, but price began to rally as anticipated.
  • Also “Bollinger Band Squeeze” Trade (BB Squeeze) or “Accordion Trade” or similar setup
  • No definite upside target. Looking to play at least one retracement.

2. Pullback retracement trade with New Momentum High


  • We expect the trend to continue because of the breakout, and wish to establish either an added position here or establish a fresh position if the morning breakout was missed.
  • Entry is near $133.40 with stop below $133.30 (below 50 period MA).
  • Still no definite upside target. Waiting to observe momentum divergence.
  • Both Trade #1 and Trade #2 could be exited near $133.60 with the momentum divergence that occurs around 11:30am.
  • Initial target might also be yesterday’s close for a perverse ‘fade the gap’ play


3. Pullback retracement trade

  • Retracement trade in uptrend anticipates a retest of the most recent price high. Danger – caution – occurs because of the observed negative momentum divergence.
  • Entry near $133.45 (20 period MA) and price target $133.65. Stop below 50 period MA near $133.30.
  • The debate between “close stops” and “distant stops” as well as “hard stops” or “mental stops” rages here.
    • Price would have stopped you out with a tight, hard stop before rallying to its target unabated.
    • Price may have stopped you out with a lose, hard stop before achieving target
    • Price would not have stopped you out with a mental stop because the ‘rinse’ occurred so quickly… unless you exited manually
  • Whether or not this trade resulted in a profit or a loss would have depended solely on your exit (stop) strategy.
  • Personally, I would have honestly taken a stop-loss here because I trade conservatively
  • This is a near perfect example of the “Perversion Trade” or “Perversion Outcome” of which I have spoken


4. New Momentum Low and Retracement into dual resistance

  • Price makes a new momentum low at 1:30pm, indicating the actual low in price has yet to come
  • Price pulls back to the declining 20 period MA, as well as the flat 50 period MA, setting up a tight risk/reward (stop goes above this confluence)
  • One could also interpret this entry as a ‘bear flag’ yet this is debatable
  • Target: Daily Pivot at $133.15 which was achieved

I tried to highlight the most ideal setups of the day and describe how they would have played out. I recommend you do this in your own trading so that you can be able to recognize ideal setups in real time based on your trading rules/strategies.

Seeing ideal setups allows you to make adjustments as necessary. Real trading will not be idealized, yet we must make the best of what we see and take advantage of the opportunities that we perceive.

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