Kane Trading - Education for Serious Traders

					July 11, 2004 Commentary (weekend edition)- For today's commentary I am going to look back at one of the potential trade setups that I showed on June 30, 2004. I think this example points out several obvious aspects of the methodology I use; yet they are ones that many miss or choose to not include in their 'Trading Plans'. We will look at the bond setup for this example. I posted some ABCD patterns that I saw approaching potential setup areas. There is/was no way to know if the setups will fully form, or, if they do form, what will happen off those potential trade areas. All I can do is keep my eyes open as things start to lay out, and watch them as they come together. I then look at the behavior as this happens, related markets and sectors, and possible entry triggers. Many out there who make market calls attempt to predict what will happen when an issue gets to a certain area. They tell their readers to buy or sell at a certain point, and usually to take a profit if so and so target is reached. Otherwise, they are nowhere to be found when all this is transpiring. For my trading, I have to be making judgment calls all the way, as the potential trade area is being interacted with. Now, is this discretionary trading? Absolutely. It's the only kind of trading I do. Understand very clearly, though, that just because a discretionary 'Trading Plan' perhaps can't be back-tested and ascribed a simple, immutable set of rules that fits all circumstances, doesn't mean that this plan can't be totally professional, and based on solid analysis and techniques. In fact, it is my personal opinion that a plan won't succeed over the long run unless it is discretionary (with the exception, perhaps, of some very adaptable teams of very big dollar players working with neural nets, AI, genetic algorithms, and the like, and I'm not 100% convinced of that, either). What I'm getting at here is that just because I point out potential setups I am watching doesn't by any stretch mean I will be taking trades. Many never finish coming together. Some that do come together don't 'act right' and I pass. Some come together, but not before doing something that alters the 'context' for me (more on this on Wednesday if nothing better comes up). Some get to the potential trade area and just blow it out, without triggering one of my entry techniques. This is the difference between making what I feel are nearly useless market calls, and working a 'Trading Plan' in its entirety. I focus 100% on the latter. I never make 'market calls'. If you haven't already read my free article The Myth of Predicting the Market, please do. Also see an FAQ I have posted: Why don't you make market calls on your website? This will help clarify the point I am making here. I bring this up now because I want it to be clear that I am posting my thoughts in this commentary, not my 'picks'. I don't expect more than one or two out of ten setups I watch as they unfold to even trigger me into a trade. It's a lot of watching and passing. To me, that's trading reality. I am trying to show, in this commentary and in my books, what I am focusing on. If you are looking for free picks, you are in the wrong place. If you want to learn my methodology, and see if you can use some of it to help out your 'Trading Plan', you're in the right place. Let's get to the bonds. I'll start with the chart I originally showed in the June 30, 2004 commentary. Recall I pointed out that I wanted the reader to create his or her own groupings, and do his or her own assessment. I just briefly sketched out the setup. I made no comment on how I actually felt about the 'context' or the fundamentals. Let's look at a moderately filled out set of groupings. Most, but not all, of the numbers I was looking at are on this chart. Right off I see a few things that shape where I will consider a potential trade, and perhaps even if I will consider a trade. Does anything jump out at you? Let me make a few comments. I could teach a whole seminar, I bet, just from what I see here, but this is supposed to be a short commentary. I'll therefore try to just hit the most salient points. The first thing I see is that the groupings are falling together fairly tightly. I see three groupings, with the 1.000 ABCD projection the likely outlier. Yes, the .886 projection could possibly be considered the outlier, but my judgment is the 1.000 is the only outlier. Without that, I see three tight groupings. I also see what I'm looking for, and that is a fairly high level of 'harmonicity'. Please read my free article on this topic, as it really helps clear up a key point of my methodology, something that I have never seen anywhere else but here. The next thing that really jumps out at me is how nicely the B point of the pattern fell on the .300 retracement. Remember that the .300 retracement is not just a 30% retracement that you see some people use; it is a very specific Fibonacci ratio that is derived directly from Phi. It is a Fibonacci number that I use very often. I also noticed that the completion point, at the .886/1.000 ABCD area, is close to the .382 retracement off the top. This is a shallow correction, and not as deep as I prefer, as I explained in Kane Trading on: Advanced Fibonacci Trading Concepts. It doesn't preclude me taking a trade, but it is not quite a deep enough correction for my preferences. This is obvious to me from looking at the chart. The bonds got hammered down, and then began to correct. The trend may be down now (look at the longer term chart and form your own opinion whether or not you feel this is the case), but unless a lot of sellers are ready to come in, I don't think the correction is done at this .382 area. This has me thinking about skipping the .886 and 1.000 ABCD areas, and seeing where the 1.128 and 1.272 areas fall. The two longer alternate ABCD setups fall right on the .447 and .486 retracements off the top. These are areas where I might consider a trade, if everything else comes together. I will be watching and waiting for a potential entry trigger in these areas. As I say: 'No trigger, no trade'. This is all part of a larger scope methodology, which in sum total I call my 'Trading Plan'. I have broken this down into pieces in my book series. Let's drop down to the 80-minute chart, and see if an entry was triggered. I'll add 5 and 15-period simple moving averages to the chart. I will use these averages to show some simply entry triggers. Notice that if I had chosen either a 5/15 period moving average crossover entry or a close below the 15-period moving average trigger, I wouldn't have been remotely close to being triggered into this trade. The areas of interest were completely blown out. Waiting for an entry trigger saved me on this one. The fade the entry traders, especially the ones who had resting orders waiting above the market (a common technique Fibonacci and pattern traders like to use; my readers know how I feel about that technique), got killed. Let's see how this looked on the daily chart, with my groupings. I've deleted the 1.000 price projection 'outlier' off the chart, for clarity. That's a total blow out of the areas. No entry trigger whatsoever. That's fine with me. All I can do is watch and see what happens. Many times there is no trade. That's the way it is. For me to trade, a lot of things have to come together, and I'm willing to wait. Many traders aren't. I was also very leery of this setup because it was too obvious to me that rates were going up. When everyone is on the same side of the boat, that's a red flag. That's why I proposed the question I did to the readers when I first posted this one. I'm trying to make you think, even if that's uncomfortable for you. The next commentary will be the mid-week edition, posted Wednesday (or possibly by Tuesday evening).


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