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How To Profit In The Short Term

03/22/12 01:28:23 PM
by Billy Williams

The bull run is still climbing, and you can use this unique pattern in the short term to help you pile up the profits.

Security:   AAPL
Position:   Buy

Against the odds and without reason, the market keeps inching higher and higher, hardly taking a breath as it exhibits an implacable resolution to creep forward, no matter how great or how little the progress. The upward drive of the current bull run just keeps on going.

Smart traders are calling for a short-term top and expect the indexes to take a break, but in this game, the smarter you are, the more likely it is you can end up with a handicap and give you a false sense of confidence; nothing good ever results in being an overconfident trader.

The market may be ready to coil up and counterstrike in the opposite direction, but for now, it is like a freight train; you know it will stop but you don't dare move in front of it or you'll end up a stain on the tracks, a statistic for the coroner and a warning sign with no one remembering your name except what a bloody mess you made by acting so foolishly. See Figure 1.

FIGURE 1: AAPL, DAILY. On Apple's daily chart, there are a series of daily price bars that close near the upper limits of their trading range, revealing that momentum is likely to follow through unless price retraces the previous price bar by 55% or greater.
Graphic provided by:
If you're already in a position, it's probably a good idea to sit tight and ride the momentum upward, but what if you've missed the bull run?

This is a common problem for intermediate and long-term traders, but the answer is to diversify your trading methods to include techniques that can get you in the game on a smaller scale while still putting the odds in your favor, so you end up a winner at the end of the day.

How? Daytrading or trading options over a one- to three-day time span could be an alternative. While daytrading gets a bad rep along with any kind of short-term trading behind it, the fact is that as a trader your job is to exploit price movement for money at the end of the day. Whether you make money on a larger time frame or a smaller one, the money is still green and spends the same. All you need is a set of tactics to take advantage of the strong bullish action that takes place at the daily price bar level. See Figure 2.

FIGURE 2: AAPL, 15-MINUTE. On the 15-minute chart, you can see the original arrows from the preceding chart where momentum was indicated, and using the smaller chart, you can pick entry points as price moves in the direction in which momentum was favored by the price action.
Graphic provided by:
When the market is on the move upward or downward, one thing that remains the same is the strong price action in the daily price bar. For example, it is common for price to open near its intraday low and then close in the upper 10% of its trading range. The greater the trading range -- anything over its 10-day average -- indicates strong short-term momentum, and price is likely to follow through the following trading day. By taking notice of this type of price action and then scaling down to the 15-minute chart, you can trade price as it moves from the small-scale periods of price contraction and go long as price moves higher.

You reverse direction when the price bar of the present trading day experiences a price retracement of 55% or more and then trade in the new direction.

You can use a combination of daytrading or options with a high delta reading of at least 0.80 with at least three weeks before they expire. Using this price pattern in the short term is a great way to stay active in the markets, but it can also be used across all time frames as well.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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