In “Trading all asset classes” we talked about a payout cycle and what to look for when it comes to price action. We want to make sure we are not targeting the beginning of a consolidation or wild price cycle. Consolidation leads to little to no profit or usually loss, and wild price action leads to unacceptable risk Either way its a cycle to be avoided AND its easy to recognize. So our first step in assessing and pouncing on a trade is to make sure we are a part of a wave 1, 2 o3 3 pay cycle OR an IMPULSE wave of profits!!
The next thing we want to do is be sure that we incorporate LOW RISK and HIGH ODDS into the picture. Again I’ve said it 100 times in the last week in various forums, articles and emails. LOW RISK and HIGH ODDS are 2 separate entities that must come together to form your signal and trigger. Low risk simply reflects your entry relative to your stop, and high odds refers to the set-up at hand.
So to put it in a real life trading scenario it goes like this. We start by looking for the SET-UP, that which gets us into the trade. Once we identify our trade set-up only then can we determine of the trade presents us with acceptable risk parameters.
Lets go with a very specific example.
Here we have a nice consolidation and large pull back after a killer pay-cycle. There is never any way to know with 100 % certainty that we are in a pay-cycle unless we let wave 1 print and then enter at wave 2 and that is a great strategy to implement. I do it all the time, but why wait for a wave 2 if you can be certain of a PUSH in your favor, get price away from your stop, almost guaranteed, and then determine if you are entering a pay-cycle or not. This allows you to get out with profit or little loss every time when done correctly.
So the key here is 1.) The set-up – in this case its a consolidating pull-back to 200 day MA support off of a nice pay-cycle. It includes a wedge pattern and trend-line breakout that is clear and concise. 2.) We also have a breakout that allows us to see a completed set-up trigger and allows for LOW RISK!
Do you see the power of combining low risk and high odds together, and how its almost artistic in nature!
Again there is no way to know with 100% certainty that a move will be a part of a pay-cycle however with the combination of observing these pay-cycles and consolidations along with a well thought out set-up AND LOW RISK entry you can more right than wrong and that my friend will put you in a class of your own!.
This turned out to be a real sweetheart!
The following is a set-up on the IWM. This particular trade was from last Thursday 9/1/11 – I show you this because it was a live trade from last week and I’m up $2,885 in just 3 days. It also provided a nice low risk high odds trading scenario. lets take a look.
First lets look At he bigger picture a daily 2 year chart where I pinpointed some nice resistance.
The entry day was on the completion of the lower sing. (YES its higher than the previous swing high, but lower than the MAJOR swing high.) This indicates that although the interim trend is UP, this could be a part of a major move down. Key word here is COULD. This is why this resistance level is so significant. Its truly what makes this set-up high odds. because at least for the sort term this thing is going to drop. If it does print a higher swing low then I can get out with little to know damage.
Lets take it a step further. I have no idea that this candlestick will STAY red and CONFIRM a lower swing until it closes right? So when do I enter short? Well for that I used a 5 minute chart and applied my same high odds sack of tricks, like this…
This break of this mild channel on the 5 minute was all I needed to give me confidence that a lower close was inevitable adding confirmation to my stance. This level also puts a barrier of resistance between my stop and my entry. My stop is just above that upper resistance level, not to tight I need to give price some room to take out stops.
Here’s the trade as of today 9/5/11 (A holiday) we’ll see what tomorrow holds !!
Click to enlarge
Hope this helps!
I should add 1 more thing to this article. The outlook for the S&P 500 was nearly identical to this IWM and as you’ll see in the results of the trade to date I also took a position on the SPY. So bear in mind that in addition to what made this trade HIGH ODDS, I also had the indication that the market itself would support my bearish stance on IWM.
It’s always a good idea to trade with the TONE of the market as a whole. This allows the market to bear down on your stance and sweep your trade into quick painless profits.