Kane Trading - Education for Serious Traders

					August 8, 2004 Commentary (weekend edition)- Today I'm going to look at something that came up in the Russell e-mini on Friday. I'm not only going to show the trade setup, but do a little discussion on reading the market and filtering pattern trades. Understand, though, that this is a relatively short column, and if you want the full details of what I've discovered over my many years working on this, you have to buy the books. I just can't rewrite well over a thousand pages of work here. My latest work, Kane Trading on: Multiple Timeframes and 'Context', is loaded with details on how I read the market and decide which patterns to trade, and which to pass on. Not only is this book filled with profound material in my humble opinion, it's material that flies in the face of what almost all pattern trading 'gurus' will tell you. It is borderline heretical to these people (perhaps right over the line?), and that should tell you something. It would also tell me that I would want to have the book, since I don't see these 'gurus' providing a lot of material that traders are finding truly useful. At least that's what I'm constantly being told. With that, let's move on. The markets started weak on Friday, and kept dropping. They hit into an area that some were watching for a reversal. Let's look at a 13-minute chart, as the MR started to bounce and set up something of interest to me. This chart clearly shows that the trend is strongly down. This has me looking for pattern setups to get me in on the downtrend. Only a larger pattern or 'context' from a higher timeframe would have me thinking this trend might be over. There isn't going to be anything on this chart that would motivate me to try and pick a bottom to this trend. Yes, it's way 'oversold'. And yes, it's way, way overdue for a bounce. At best, that might have me standing aside. But I wasn't all too convinced I wanted to trade against what we are looking at right here. And I had more behind my reasoning than that. First, this was a Friday, things looked bleak, and I didn't see them wanting to hold over the weekend, or add more for holding over. Granted, if the overdue short covering came in, all bets are off. The squeeze would be on, and it would draw people in. But it didn't seem to be happening. A lot of times this starts in the last few hours, but I wasn't getting the feeling it was about to pop. I was also watching something else. Let me add that in. I drew in a median line and parallels, sometimes called an Andrews pitchfork. I noticed that, as I drew it, it represented the price action pretty well up to Friday's action. Then the MR gapped and broke below the lower line. To my way of thinking, this was either climactic, or a serious breakdown. If it was climactic, I think the volume and behavior would have clued me in to that, and it didn't. It did not act like a capitulation at all to me. And then it set me up. Can you see it right there on the chart? Let's go down to a 3-minute chart and take a look. The MR formed an ABCD pattern for me, set up to continue the downtrend. I have added just three of the key retracements/projections that I had in my grouping. There were quite a few more, all hitting in this same area. The lower median line parallel, although slightly below the grouping and slightly exceeded by the price action, was right in the same spot. I felt that if this was a breakdown, it was likely the line could be tested from below. When an ABCD pattern set up with a very tight grouping right in the same area that was the deciding factor for me. I no longer felt a reversal was likely. Nonetheless, I still waiting for an entry trigger, and it was forthcoming. Let's see how this played out. The MR dropped like a rock off the pattern and lower median line parallel area, and gave more than enough of an opportunity for a profit. How much of the move might have been caught would depend on the management plan. For me, the bounce in the middle had me scaling out of a good part of the play, and then re-entering back on most of those contracts on the rollover. The final exit was just after this chart was captured, on the small short covering bounce. My read and instinct was right, they didn't want to hold over the weekend, or come in at the 'bargain' prices. The clear setup came, and told me which way to look. I see many, many patterns as I watch the market. I take only some of these trades. I need 'context', and I need to read the market. This is subjective, no way around that. For me, I can't trade without making evaluations. I'm a discretionary trader. Maybe some people can just trade every pattern they see and do well, but I sure can't. I have to evaluate and judge. I try very hard to show this process to my readers, and in Multiple Timeframes and 'Context' I really worked hard to lay it out such that my thinking process could be seen and hopefully understood, so that the reader could then begin a similar process for him or herself. I hate to rain on some people's parade by telling them that just learning the patterns isn't enough. As I've tried to say so many times, the patterns are only one small part of a complete 'Trading Plan' as it is. And they aren't cut and dried in my plan. There is a method to the madness, though, and it isn't whimsical. I've tried to help people learn what I do, but it's a skill, and it takes time and effort to master. I'm repeating a lot of my own clichés here, but ''A pattern is a pattern' just isn't so'. The next commentary will be the mid-week edition, posted Wednesday, if I don't have a relapse on my road to recovery.


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