Kane Trading - Education for Serious Traders

					February 29, 2004 Commentary (weekend edition)- I'm slowly getting over my withdrawal symptoms from doing the commentary only twice per week now. I am really making progress on the books, and although it's still going to take awhile before they are done, I at least feel that I'm really getting somewhere with them. Before we look at some plays, I want to relate what I think is a very interesting analogy. I live out on a 'desert ranch' where my better half and I frequently feed the birds and other small animals. Among the numerous varieties of animals that frequent our property (besides a very cool resident bobcat) are two species of small ground squirrels. These little guys come out and eat the bird food and drink from the water trough we have put out. Now, what has this got to do with trading? I love these stories where it seems apparent that I've gone around the bend. I like the confidence that I feel I've instilled in my readers that every time I start out a story all crazy like this, it does, in fact, end with a fairly cool trading point. This time should prove no different. Lately a large hawk has taken up residence in our yard, and is hunting the feeding area. I've had literally hours to watch his behavior as he goes about doing what hawks do. It's been interesting to watch him, from a naturalist's standpoint. It hit me, though, just a few hours ago how similar his strategy is to trading. Here's what he does. He perches himself in a tree some twenty or so feet away from the main feeding area. When he first flies in, everything scatters. He then sits motionless for as long as forty-five minutes, while absolutely nothing happens. He moves not a muscle. Slowly, all the animals return. The ground squirrels start moving all over the area, and still the hawk does nothing. I look at the setup, and can't see why he isn't swooping down. Then, suddenly things line up like he has been waiting for and he makes his play. Down he swoops, and everything runs. He has one already picked out, and straight at it he goes, talons full open. So, what happens? Well, this isn't a fictional novel for the masses that I'm writing here. He misses. Then he generally sits in that spot, motionless for fifteen to forty-five minutes, perhaps hoping that the little squirrel will come out from the immediate cover it ran into, and make a dash for its regular nesting hole. Once the hawk decides that it is futile to wait any longer he flies back to the perching spot and waits, again motionless, for what, to me as an observer, is an excruciatingly long time. He does this over and over again. Finally, after repeated tries, he makes a score. A poor, hapless squirrel zigs when he should have zagged, and the hawk scores big time. Proportionately, the squirrel is a very substantial meal. The hawk disappears for a while, and then reappears again, playing out the same routine. He has a game plan that works, and he executes it. The most notable thing that I took from these observations was how many seeming opportunities he passed up, when I was thinking 'Go!' and he was thinking 'Not yet, not a high enough probability setup, be patient.' Once I saw this, all I could think about was my own trading. This hawk had infinite patience and saw the virtue in only acting on the highest probability setups. Not only that, he seems to have no concept of discouragement. He didn't even think about how many 'small losers' it took to get a solid winner. He only seemed to care that overall the game plan was 'net profitable'. The hawk's very existence (and plump appearance) attested to the 'net profitable' aspect of his plan. The fascinating thing about this analogy is that it's not made up. It's not a work of fiction, created because it makes a good story. It's absolutely true, and as I write this my better half is watching him at is post, after setting himself back up there following a failed attempt (albeit a very, very close one) that I just witnessed, and which inspired me to come and write this up this very instant. It seems that the parameters of a winning game plan are more universal than I had thought. This weekend I have a few interesting things to point out. I'll start with a trade in the NQ that came together on Tuesday. A really nice 5-point pattern set up, and the grouping was showing some interesting things. Since I want to discuss just two of the factors in the grouping, I'll just jump ahead and highlight the pattern and show the ensuing move. The NQ played out beautifully off this pattern. It is the ability to find pattern after pattern like this that motivates me to use them in my 'Trading Plan'. But that's not why I am showing this. I know my readers don't need any examples that just show how well these patterns can work. I am showing this example to demonstrate how the potential trade area was focused on two key retracement numbers. I'll add those to the chart and then explain. The two numbers shown on the chart are the .886 retracement of the XA leg, and the 1.902 BC external retracement. The numbers overlap almost exactly. I'm showing this not only to point out how key I feel that my .886 retracement is, but also to point out that I feel the 1.902 external retracement can be very important, too. (I explain the derivation and use of the 1.902, in great detail, in Kane Trading on: Advanced Fibonacci Trading Concepts.) The 1.902 retracement, used as I have used it here, has not been adopted (yet!) by a lot of traders. This makes it all the more important for me to utilize it, then. I like to look at things that the masses are not aware of, or if they are aware of them, choose to ignore them. In fact, the more the masses deride something that I use, the better I feel about it. Until very recent times that's how any use of Fibonacci was looked at, with derision. Now it's 'cool', and everyone uses it. My point is, don't overlook the 1.902 because it's not real well known yet. I find it's one of my best numbers. Let's move on to a play that I am following in EP. This set up as a fairly good 5-point pattern, with a nice, clean entry trigger. I'll highlight the pattern on a daily chart. I'll leave it to the readers to form their own groupings on this one, if they want. My entry trigger came at just about $7.00. It's a tough call in here to 'guess' if I think this one may continue any more. That last bar looks pretty weak, and maybe EP has done all it is going to do. But that's just supposition, done for fun at best, and doesn't factor into my management plan at this point. What I want to show with this one is some of the additional reasoning behind the trade potential I spotted. Sure, there were gaps that got filled, and a really nice pattern, but there was something more. I was looking at the potential trade area before it was hit, and noticed a nice symmetry forming. First, let me put just one time projection on the chart. It looked like EP was going to hit into the PTA at just about the same time length for the CD leg as it took for the AB leg to form. This had me looking at some other time relationships. I'll put two more onto the chart. I've added the .618 time retracement for the XA leg, which is the entire ABCD. I've also added the 1.000 time retracement of the BC leg. It is clear that these three time factors all hit pretty close, with two hitting on February 25, and one on February 26. The actual reversal day was February 25. This is what I call a 'time grouping', and I construct them just as I do price groupings. This time grouping had me ready, at this particular time, for a potential trade. I wanted to show this to keep the readers mind open to experimenting with the techniques using time as well as price. At some point (way down the road) I plan to do a book on time groupings, as this is also a very heavily requested topic, right behind my use of multiple timeframes and 'context'. The next commentary will be the mid-week edition, which I will post on Wednesday.


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