|Here's a real-life intraday trade that I completed today, one that was fairly low-risk, especially since I predicted that today would be a market reversal day. The concepts are simple and timeless, and best of all, they offer savvy traders a high-probability setup that allows me to trade stress-free. Here are the details (see Figure 1).|
|FIGURE 1: TNA, THREE MINUTES. Trading long intraday breakout setups after a stock/futures contract has made a confirmed daily low (in the wake of episodes of major panic selling) is one way to put the power of the inevitable market bounce to work for you.|
|Graphic provided by: Interactive Brokers TWS 3-minute chart.|
|Anyone following TNA, the exchange traded fund (ETF) that offers triple leverage based on the action of the Russell 2000 small-cap stock index, realizes that it recently suffered a 30% decline in the space of two weeks. For experienced traders, such a decline wasn't unanticipated, and now that the market has already appeared to have reached firm support (on November 2, 2009, near $34.50), shrewd intraday traders would already have been looking for low-risk intraday long entry setups. Even the sharpest downdrafts will stop, reverse, and retrace a portion of the decline, and TNA is no different. Knowing that a retracement higher was a 90% and higher probability starting sometime this week (as TNA had actually declined during nine of the prior 10 trading sessions), a trader monitoring a three-minute chart for a suitable long breakout was very likely to find exactly what he or she was looking for -- an easy way to cash in on the rebound in TNA. |
Today's session went a bit lower near the open before slowly reversing higher, flushing out the remaining late shorts to the TNA sell-a-thon. As the morning progressed, TNA gradually began to hug and then cleave to the daily intraday pivot point (PP) near $36 as it oscillated above and below its 50-period exponential moving average (EMA). Finally, as the stock began to rise sharply above the PP, the first signs of what would eventually become a picture-perfect pennant/triangle formation began to manifest.
As prices began to shift during the pennant formation process, the 50-period EMA was successfully tested no less than three times, and when the upper channel line of the triangle was penetrated, I went long 50 shares at $36.33. Knowing that there is usually a minor pullback to test the channel line (resistance turning into support), I added another 30 shares at $36.09 a few minutes later.
Meanwhile, the ParaSar indicator/trading system had also triggered a long entry signal (see the series of blue dots above and below the price bars), offering me a totally objective manner in which to manage the initial stop/trailing stop aspect of the trade (in the absence of such a ParaSar signal, the 50-period EMA would have been my initial stop, gradually rising to a three-bar trailing stop of the lows). The trade immediately caught fire, breaking sharply higher out of the pattern one last time, quickly rising up toward the $37 level in about 25 minutes, which is where I took off the 30-share portion of the trade for about a 93-cent profit. Then, simply watching the ParaSar trailing stop dots update in real-time, I automatically closed out the 50-share portion of the trade when TNA dropped two cents below the stop at $36.87.
All in all, commissions included, this three minute-based daytrade netted $50 with very low risk. Had I had more free cash in my Interactive Brokers account, that could easily have turned into $150. I normally don't trade on margin, as the risks just aren't worth the rewards, particularly when trading with a discretionary method like this in a highly leveraged trading instrument such as TNA. Regardless, it was a happy, satisfying (and very much expected) outcome, one that makes it such a joy to be a trader and investor.
|In review, when you see a stock, ETF, or futures contract sell off to a mind-shattering degree in the space of a few weeks, and that tradable is giving multiple signals that it has exhausted the down move on its daily chart (it bounces off major support levels, Fibonacci swing ratio analysis gives multiple confirmation that a reversal is due, the detrend goes to extremes and market sentiment goes to highly negative territory, prior swing highs/lows act as support, and so forth), the next step is to prepare for the inevitable bounce back higher. Even the most severe downdrafts will typically retrace at least 23.6% of the move down (that's a Fibonacci level, by the way), with less severe down thrusts able to retrace a full 38-50% of the move down. Knowing this, you can look for intraday long breakout setups similar to what we've examined in this article, setups that are well-positioned to take advantage of market rebounds. |
The key point is this. Whatever kind of breakout pattern you choose to engage, make certain that the stock of commodity in question has made a significant, successful test of intraday support. The intraday support level can be a major moving average like a 20-, 50-, or 200-period EMA, or even the famed 89-period simple moving average (try it sometime, it really delivers, all else being equal). Prior swing highs and lows are also wonderful support areas, as are the upper and lower boundaries of well-formed consolidation areas. If you're really blessed, sometimes you'll find prebreakout support coming in from all three of these technical areas, giving you that much more confidence to pull the trigger on fast-moving intraday breakout setups. And they don't come much faster than they do with TNA.
|Title:||Writer, market consultant|
|Company:||Linear Trading Systems LLC|
|Jacksonville, FL 32217|
|Phone # for sales:||904-239-9564|
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