Do More of What Works...

I've been reading Jack Schwager's Hedge Fund Market Wizards, which is a phenomenal book and is just as good as his first two and I highly recommend it to anyone who trades or is interested in trading.  One of the hedge fund managers in the book gives the advice of "find out what works and do more of that" or something to that effect.  Although simplistic, there is a lot to this.  One thing that I've been doing more of lately is active currency trading.  Why?  Simply because my account records show that it works for me.

That is why I want to talk about how smooth the currency market and in particular the Eur/Usd currency pair has been lately for short-term trend and swing trading.  When trading currencies, you must have a routine and specific set ups that you look for and then trade them.  And when those set ups are working well you have to trade them more.  Right now, the opening range breakout trade has been excellent.  The past two days have provided great opportunities to make significant returns with only trading this set up.

I have addressed the opening range break out trade in several posts, but I'll quickly explain what it is for those that are unfamiliar with it.  Basically, you take the first 15 minutes of trading (or it can be 5 minutes or 30..different people use different times) and you note the high and low of the period.  That creates the range. Then you patiently wait for the price action to trade out of the range and trade in that direction.  Generally, I'll day trade with the 5 minute and 1 minute charts.  I'll first look to the hourly and daily charts to determine the bias or the primary trend and then look to for break outs in that direction to trade.  So for the past few days, the bias has been to the higher side...that tells me the path of least resistance is higher and I should look for long trades.

Then I wait for the break out and put the trade on immediately after a 5 minute bar closes outside of the range.  After that I trail a stop with the 1 minute chart and look to book partial profits into momentum and use the trailing stop on the remainder of the position.  If the currency trades back into the range or to the bottom of the range you get out..or have a stop sitting there.  With currencies, it is a little difficult to determine the open.  I will generally trade the 8:30 stock market open with the Eur/Usd since it is pretty correlated with the US stock market.  After I've exited a profitable trade, I look for pullbacks and the support to initiate a follow up trade back to the highs.  After this, I'll look for the highs to be taken out and then trade that break out.  Then I'll look for another pullback from the new high and once it finds support I'll put on another trade.  That's it..plain and simple.  If I'm seeing follow through and the trade is working, I'll keep doing it over and over and over.

Here's a 5 minute chart with today's Eur/Usd with an opening range plot on the chart and some of the trades that I made today.

The opening range is the yellow shaded region.  The bars are all green on this chart because my trendfuzz indicator was in Strong Up Trend mode all day long...not a common event.  Notice that I did not take the OR break below the opening range, as this was a low probability trade given that the trendfuzz was green and the overall bias was up...that's not to say that it always turns out this way, just that today was a perfect day not to take the short trade.  Other days I might take the short trade even with a prevailing bias to the upside, I would just trade a smaller position and book profits very quickly.  Today was a little different because yesterday was incredibly strong and my personal sentiment is very bullish.

This type of trading can be very profitable and very rewarding, you just have to maintain discipline to wait for the proper entries and cut losses quickly.  It is by no means easy and often is very frustrating which is why some people are not suited for day trading.  Over the years, I've gone through periods where I thought I was good at it and was very suited for it and other times where I questioned whether it was for me.  The thing that I've noticed is that day trading equities is a little more hit or miss with me but currencies have been profitable for several years..I just have to stick with it and trade through those incredibly difficult draw downs that have a tendency to leave traders gun shy right at the moment that the next winning trade needs to be put on.  Ok, that's enough rambling for one day.  Hope everyone had a great week and has a great weekend.

TLT

Old Resistance Holds with $TLT

It was weird..just a few minutes ago I was scanning through some charts on FreeStockCharts and noticed that TLT, the 20+ year long bond etf, stalled out an upward advancement right at a green line that had been marked on the chart last summer.  Marking certain charts with red and green lines used to be common practice for me.  I haven't done it in a while but I do like to look at where price action is compared to old support and resistance lines..especially when price reverses right at one.  Check out the chart:

Hopefully all of you are not just holding up but also profiting from this market.  Volatility can be a great thing for certain styles of trading.  I think the worst is likely over, but you never know.

TLT

SPY Entering Bearish Resistance Zone

 It will be interesting to see how the market reacts to the levels we're at.  So far, the resistance is holding.  Anytime the market repeatedly tests the same resistance point, it's like fuel for the fire that is building and all we need is a spark. 

Lately it has paid to be skeptical of such moves and fade them or to sit it out all together.  I'm personally waiting it out as far as equities are concerned.  There's a lot more interesting action going on in Bonds and Currencies right now..such as bonds are calling for stocks to sell off from the resistance but currencies are favoring a break out.  Who will win?  More importantly, how will you be able to tell when someone wins and then capitalize on it?  These are the questions you should be asking and incorporating into your current game plan.

TLT

Potential Swing Trade...AFAM

This stock has been on my watch list for some time now. It has had a tremendous run-up over the past year, especially considering what the over-all market has done at the same time. Recently, AFAM's run has stalled and now it's entering the bearish stage of the trend cycle. This can potentially present a good opportunity to get into this stock at a price that offers a nice risk/reward trade. As you can see by the above chart, AFAM initially broke out of its overhead resistance, the blue line, and ran all the way up to $45. Now it is falling from its highs and the indicators are looking bearish. Their was recently a bearish cross on the MACD, the blue circle. Also the 10 period exponential moving average has started to point downward, which is a sign to sell. I would be looking to enter a long position in this stock around the $22-$26 range, somewhere within the green box at the edge of the chart. The $22-$26 range should offer some support because it's close to the break-out range and the price will be low enough to make several indicators give a buy signal. Once it touches the 26 level, I'll be looking for the MACD, BB width, and the moving averages to start giving bullish readings. Only time will tell, I'll give you an up-date in a couple of weeks after the stocks had time to play out. Good luck out there.

TLT