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 May 12, 2004 Commentary
(mid-week edition)-
Today I'm going to discuss, once
more, the importance of trailing stops and scaled exits for my trading. I wrote
my book Kane Trading on: Trailing
Stops to show a good part of the methodology that I use to attempt to
maximize my winners. As I explained in that book, I feel this is a very
critical aspect to trading. It just never ceases to amaze me how literally
stunned people are that I don't use 'profit targets'.
I'm choosing
this as today's topic for two reasons. One is that I have been getting a lot of
questions on my trade management and trailing stops lately. The second reason
is that we had a quintessential run today that exemplifies why I manage trades
the way I do. This trade is similar to the recent LC play, where my plan had me
letting it run until the trailing stops indicated that it was time to scale
out.
Lately I have been getting a lot of questions asking me how I might
manage different potential plays. Of course this is all asked from an
educational standpoint, since I am not allowed (ever) to give any specific
advice on any specific trades. But this is academic anyways, because I always
start with the same answer. It goes something like this: 'Now, I know you have
my book Trailing Stops. I use the methods in that book. Are you working
with those methods, trying to see if they might work for you, as they are
presented, or modified in some way?'
Here's the kicker. Do you know what the
answer has been, over nine out of ten times? I expected to hear a resounding
yes, but that this or that aspect was unclear. Instead I'm hearing things like:
'No, I just haven't got to the book yet', or 'I've read it, but I haven't done
anything with it yet', etc. I guess I don't understand why these people are
asking me questions, then. I wrote the books so that my methodology would be
available for those that want it. If I had the time and energy to explain it to
each and every person that asked me, I wouldn't have bothered to write the
books. The answers are in there.
The other thing I get a lot of is
people buying all my books and articles except Trailing Stops and Entry Techniques. I ask these
people why they skipped those two and they invariably say: 'Oh, I already have
all that stuff down cold.' These same people then e-mail me and ask me
questions that are right in the books. I'm just trying to make it clear that I
have done an immense amount of work writing these books to make my techniques
available. Just about everything I do I have put in the books. There are no
'secrets' to my trading; there is just a lot of hard work, sticking to my plan.
My plan is in the books.
I feel that successful trading is about building all
aspects of the 'Trading Plan', not just the potential trade area i.e. the
pattern, or whatever. I have said this time and time again. This is the most
difficult thing for traders to accept, it seems to me, as they keep trying to
find a better guru with better patterns. I believe you can only get so good of
a signal, and then it becomes a diminishing returns issue. I spend my time
developing other trading skills, like better trade management. I'm just trying
to point out some key things that I feel few, if any, other trading educators
point out.
Let's look at a trade sequence from today's ES mini. The
ES is forming a very large ABCD pattern off the March top on the daily chart.
Let's look at the 13-minute chart, where I'll show the .886 and 1.000 price
projections for the ABCD pattern. I'm showing these projections to point out
the general area where I'm watching the ES for a potential reversal on the
larger timeframe.
On Monday/Tuesday the ES formed an ABCD
pattern (highlighted), set up to continue the downtrend. This didn't give me a
lot of follow through, and that was somewhat expected due to the rampant
selling that had been going on for so long before this. The ES closed strong
after taking out the ABCD high. It also formed another, smaller ABCD right
before the close. This all set up the next run down, which we got
today.
The market gapped down and I was ready to play the short side. I
was playing all the way down in the morning, but planning ahead for a potential
reversal and a switch to the long side. At the very least, I felt a bounce was
coming. Let me explain what I was thinking. We have a major ABCD forming on the
daily. This is a larger scale setup, and not one I would likely play (if it set
up and triggered me) with the mini. This is a play I would lean towards options
and/or EFTs.
That's a separate play. I'm also playing the mini, and trying to
keep in line with the larger direction. That's why the two price projections
look so far apart on the chart. The 13-minute chart is a full two, perhaps
three, timeframes down from the pattern. To play down on the 3-minute chart,
all I can utilize is the idea that somewhere in this area a larger scale
reversal may take place, even if only for a bounce.
That tells me
that I might want to start taking long trade shots. Now I rely on my daytrading
skills and the context of the mini with respect to the chart for that day. I'm
looking at the time of day, the range, the likely support and resistance, and
the patterns. This will help me decide when I can take acceptable reward/risk
shots.
This column is too short for me to get into all of the detail of
what I do. I'm watching volume on the 1-minute chart, I'm building groupings
and looking at the Fibonacci retracements, etc. Let's look at the 3-minute
chart, and I'll highlight where I took shots.
The two horizontal lines are the approximate
values of the two price projections from the 13-minute chart. The first arrow
was about a scratch trade. The second trade gave me an excellent entry setup on
the 1-minute, so I took that. I'll show that next, but first I want to comment
on my play in here. I'm not using the groupings that I formed from the
daily/weekly ABCD to trade the 3-minute chart.
That's why I haven't shown them
here, and why I'm willing to trade anything in this general area without
concern for the groupings. This 3-minute chart is all 'noise' as far as a
weekly grouping is concerned. I just know that this is where I'm thinking
things may change in the larger timeframe. Let's look at that 1-minute
setup.
The ES formed a great looking ABCD right at a
.618 retracement. I was watching other things, too, volume being one, that also
had me alerted here. The arrow shows the approximate area of entry. Let's go
back to the 3-minute chart, and I'll show the rest of the day's data, and then
we'll discuss what happened.
The second trade didn't go far, and
eventually rolled over. It was another scratch, for the most part (I say 'for
the most part' because to me a scratch is anything that is a tiny winner, break
even, or a tiny loser. 'Tiny' is probably up to about half my usual stop amount
of 1.50-1.75 points for trading the 3-minute timeframe.) Now I got another
classic entry setup after the next low, and I took shot number three. I'll play
that game all day, taking shots where I can scratch if it doesn't play
out.
Notice I didn't say 'if I was wrong', I said 'if it doesn't play
out'. Regular readers know exactly why I would never say 'if I was wrong'. If
you don't know why I wouldn't say that, read my free article The Myth of 'Right' or 'Wrong' on a
Trade. Okay, back to the trade. This time the trade took off. It went
harder and longer than I ever expected. I put a 10-period simple moving average
on the chart to give a basic idea of something I might use as part of my
trailing stops/scaled exits plan.
I detail this in Trailing Stops. I'm
not a 'scalper' on the mini at all. I play for the moves like this. I describe
my mini playing as 'intraday swing trading'. This was an incredible example of
why I don't use profit targets. I was asked live in the chat room today, once I
was in, how I planned to manage this, and what my target(s) may be. My answer
was as I mentioned earlier. No targets, manage according to my plan using
trailing stops and scaled exits. Most of the trade was closed right before the
close. It was the longest run I've had in the mini in as long as I can
remember. I would truly be up tonight tossing and turning if I took this off at
some small, early 'profit target'. I simply can't trade that way.
One thing I
want to make clear here, although it should already be clear. I have pointed
out many big runs in this column, and live in the chat room as I manage them.
But to get those, I have to probe and try many times. I am not uncomfortable
with trying two, three or even four time for a move. As long as I can position
such that most of the time I scratch when it doesn't play out, I'll play that
way all day long. I can only catch the big moves because I'll keep trying, and
because I can pick the spots such that those tries don't take up all the
potential profit from when I catch one.
It's also critical that I maximize the runs.
Before I maximized the runs as best as I could, and learned to pick the
specific entry spots (not the potential trading area) such that I could scratch
a lot of the non-winners, there frequently wasn't enough left after the tries
to show a profit overall. I improved my game outside the area of picking the
best potential trade areas, and that has made all the difference to my 'Trading
Plan'.
The next commentary will be the weekend edition, posted on
Sunday.
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