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Is Timing A Perfect Entry Really A Missed Opportunity?

09/10/09 09:27:48 AM
by Donald W. Pendergast, Jr.

Have you ever missed a great winning trade, simply because you were waiting for the perfect entry price? If not, learn from my mistake and save yourself some traders remorse.

Security:   ESU9
Position:   N/A

You've seen it coming, clear and strong as a freight train hurtling across the Great Plains on a sunny summer day. No mistake here, this is a low-risk, high-probability trade setup, one that has no way of disguising itself from the sharp eye of a discerning trader. And it's coming your way!

FIGURE 1: ESU9, THREE-MINUTE. At the end of the day, only those who follow through on their well-tested trading methodology will ever have anything to show for their efforts.
Graphic provided by: Interactive Brokers TWS 3-minute chart.
The freight train I'm referring to is the venerable emini S&P 500 futures contract, the old reliable tradable that typically offers carloads of profit potential each and every trading session for those who've trained their eyes to see the big picture. But even though the emini usually sets up with a couple of great trade setups every day (on a three-minute chart), trader psychology and self-discipline is ultimately the deciding factor in determining who wins, who loses, and who misses the train completely. In the previous paragraph, we see how a picture-perfect, textbook-classic price-momentum buy signal manifested itself on the three-minute emini chart just before noon, Pacific time. I've seen hundreds that were similar, and the large majority of those trades were winners, offering a reasonably quick profit with modest drawdown. (See Figure 1.)

So, I watched the second cyclical low form at around 1152 PT, right near intraday pivot level R1 (violet horizontal line on the chart). The NYSE tick, TRIN, up/down volume, and advance/decline ratios were heavily biased toward the bullish side of the equation, and I'd also received confirmation that a daily based system had also fired a buy signal on the Standard & Poor's 500. Everything was lining up like a dream, so I placed a buy limit order for 1027.25, right at the lowest level reached on the second cycle low, the one that had just confirmed the bullish divergence between price and the nine-period momentum and 21-period Chaikin money flow indicators (see lower portion of the chart).

I waited for a couple of minutes, certain that a minor retest of 1027.25 was imminent. Then I waited another minute or so, but no takers at 1027.25; in fact, price quickly shot up to 1028.25 and never fully retraced back to the cycle low. By the time the price hit 1029.00, I realized that the risk-reward ratio of the trade was unfavorable and that I had just missed out on one of the nicest, easiest, fast-profit three-minute emini setups of recent memory. Ultimately, it only took the contract a mere 24 minutes to gain the four points needed to move from 1027.25 to the next swing high of 1031.25, after which it briefly paused, consolidated, and began to run even higher. I missed a 3.75-point gain because of my unwillingness to bump my buy limit order up by one measly tick.

Disgusted, I turned away, reminding myself that trying to pick up an extra tick (0.25 of a point in the emini S&P 500 contract) just isn't worth missing out on a 4-plus point move. Perfectionism is one of the worst personality traits for the serious trader to deal with, and the sooner you come to realize that the financial markets are extremely imperfect and filled to capacity with jagged, ragged pools of conflicting biases, emotions, and belief systems -- well, the sooner you learn that, the more likely it is you'll begin to start extracting profits on a regular basis. Normally, settling for 90%, 80%, or even 75% of the ideal gain on a perfect trade is far superior to trying to milk every last dime out of a run -- or even worse, missing out on a great trade altogether, simply because you were trying to hold out for a perfect fill at entry.

For those new to intraday stock index futures trading, here's a brief primer on the technical layout used on Figure 1. The time period is set at three minutes, and I use a 15-minute chart to help provide a sense of higher time frame trend. In addition, I also use the NYSE TRIN, tick, up/down volume ratio, and advance/decline ratio to help determine if the market is in a bullish, congestion or bearish mode.

On the chart itself, I overlay the floor trader pivot points (the five horizontal lines on the chart, each representing a likely area of meaningful support or resistance for the day's trading action), a 20- and 50-period exponential moving average (EMA), a nine-period momentum indicator, and a 21-period Chaikin money flow indicator. On occasion, I will also use Fibonacci retracement/confluence measurements and price cycle analysis, but that isn't as essential. The basic trading template is useful for trading price-momentum divergences (bullish and bearish, as the case may be), but be advised that it takes many, many months (if not years) to properly synthesize all of this technical imagery and statistical data into a form that you'll be able to use day in and day out in order to consistently profit in this highly competitive market.

A parting thought. Practice may make perfect, but in the world of discretionary trading, close enough is usually good enough.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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Date: 09/10/09Rank: 5Comment: 

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