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 June 19,
2005 Commentary (weekend edition)-
Well, I'm
back and ready to go. I had a great break, and I'm back in the saddle now. If
you've held off on a purchase, feel free to 'fire at will' now. I will begin
shipping again tomorrow. As usually happens when I take a break, I had time to
think over some new ideas. I am working on some things, and as they develop I
will discuss them in here and on the What's New page.
Since I am
just getting back to things I will not write a commentary with a lot of current
charting. Instead I will address some of the questions I get on a repeated
basis, with a few charts that show my point.
Let me start by explaining an
aspect of my methodology that greatly differs from most patterns traders.
Before I do that, though, let me say that I don't really consider myself a
'pattern trader' in the sense that I base my trading around the 'named
patterns' such as the Gartley, and so on, although I am completely aware of all
of those patterns as part of my 'context' analysis.
My basis is
more the ABCD pattern, with various aspects of trend, 'context', median lines
and trendlines, Fibonacci groupings using an extensive series of
Fibonacci-derived numbers (many of which I have derived), and all the rest of
what I have put in the books. None of this is anything new for my regular
readers. I just summed it up in a very brief form there.
One of the
things, though, that is very different from all the 'classic' pattern traders I
have seen is that I incorporate a lot decision-making at my potential trade
area (PTA). I need to see the 'context' of the setup. If the criteria I need
with respect to 'context' are met, I need to see how the price acts at the
area. Many times the 'context' leans me to think the
area won't hold, and when breached, may react strongly in the opposite
direction. This has led me to form at least one very distinct setup I call 'the
wave 4 bounce' play.
Once I start reading the price action, this tells me
things about the setup. I may decide not to take a trade there, or I may decide
to fade the setup. When I say 'fade the setup' I don't mean just do the
opposite. I mean look for an entry setup that may trigger me in against the
original premise. An example may be a PTA I want to fade, and then it reacts
slightly, pulls back in a small ABCD at a line and Fib grouping, and then gives
me an entry trigger.
I take into account many factors as I assess a PTA, some
before the area is reached, and some as it unfolds. This is discretionary
trading, no doubt about it. It's not even remotely close to being in my plan to
say 'Here's a PTA. When it gets there I'm in at this price.' or 'Here's a PTA,
and if it gets there and starts to reverse, I'm in.' It matters to me
how it gets there. It matters to me how it reverses. This is not
like anything I have seen in other pattern trading material. And this is why I
have no idea what I may do, or what may happen, at a given PTA.
I watch and
study the action, and I constantly refine my trade premise as the potential
decision time nears. I want to use all the information the market is giving me
to make my best decision. I have said this many times before, and I'll say it
again now: I look at my PTA's as 'action points', not areas that I
expect price action to reverse. This is unheard of for this type of trading.
But a lot of what I have developed and shared was unheard of, so that's nothing
new for me.
What all this means is that I have developed, with my extensive
experience, a feel for 'when to trade 'em, and when to fade 'em'. And
understand that this also does not mean to jump on a breakout of a 'failed
pattern', which is usually way too late, at least for me. It's more about my
anticipating the failures and looking for smaller setups on lower timeframes to
get me in, in advance.
I explain a lot of how I do all this in the books, and
when someone mentors with me a lot of the focus and time, once the basic setups
are covered, is usually on the subtleties of how I do what I do. This is also a
key topic on an almost daily basis in the members' section. I am
always pointing out setups I am watching, and explaining what I like and don't
like, and what my assessment is as far as if I'm looking more to trade or fade
the setup.
I mention what type of price action I am expecting, and
what the 'context' is telling me. I look at a whole host of factors, and I
discuss them extensively. This isn't a promo for the members' section; I'm
making a point. I look at a lot of factors and I look for certain things to
come together. I have an idea of what I 'expect' to happen, and that guides me
as to what I want to do if it unfolds as expected, and if it doesn't.
There is a
lot to this approach, and I feel the best way for me to show what I do and have
others learn from it is to show it in the members' area on a frequent basis and
discuss the reasoning behind each assessment. If you don't want to sign up and
study this with me, at least be aware that my approach is not just a 'straight'
application of the patterns. It is a highly filtered approach, done without
indicators, one that sometimes calls for me to fade the setup before the setup
is violated.
Let's look briefly at a few that I mentioned in the members' area.
I'll start with the XOI.
The XOI had set up a great 5-point pattern
that came together right at the intersection of two key lines. After the
initial reaction it sat at a key line that had been tested multiple times.
Everyone I heard was calling for a sharp reversal down. I was thinking the area
would 'blow out'. I had the option to just ride an existing play, or do more
with the area.
One option I sometimes look at under certain conditions is putting
on a long straddle. Take a look at this one on a lower timeframe and see what
came together as far as a potential entry setup. It doesn't get any better for
me than the way the XOI has been behaving lately. I have been discussing this
one for as long as I can remember, as it is very good for my trading. There are
a lot of choices are far as actual instruments to trade around the setups in
the XOI.
Let's see what this one has done.
As I suspected, the area was ignored, and the
XOI is again at all-time new highs. This isn't after the fact analysis; I
discussed this in advance for the members. It's more about my assessment at the
critical areas than it is about the areas themselves. The areas must meet my
criteria, of course, but that's just a small part of it. As I have said many
times, the PTA is only 10-20% of my 'Trading Plan'.
Let's look at
one more, this time in PD.
This is a chart that I had been developing
for the members as things unfolded (I actually put a trade together at the
first arrow, and the ML set was on the chart at the previous swing-low). This
is a point where some very key things came together. I suspected PD would blow
this area out, and a substantial move may ensue. When key areas go, the
reactions can sometime be strong. This is another area I might be looking at
straddles, as well as my more typical plays.
Before we move on to see what has
happened since this point, let me remind the reader that the .300 retracement
shown on the chart is not just a '30%' retracement, but a specific retracement
that is directly derived from Phi, the Golden Ratio, as I showed in Kane Trading on: A Totally New 5-Point
Pattern. It's just a coincidence that some people use a '30%'
retracement. To the best of my knowledge I am the only person to date to show
this Fibonacci derivation.
Let's see what happened from here.
PD reacted slightly to the area (look at this
on the 15-minute timeframe, as there was one of my adjusted ML entries there
that was awesome), and then took off like a rocket. This is what I am talking
about. I had 'context' and
a host of reasons not to trade this area 'straight up'. The same as with the
XOI, I had already gotten a setup off the low. Now I had to decide how to
utilize my assessment of the critical area.
This isn't
after poker here. I discussed this in advance in the members' area. I do a lot
of work on PD, as it is a great stock for my methodology, and I had been
showing this well before this point. The point is that I am constantly working
on knowing when to trade 'em, and when to fade 'em. I hope I have been able to
add to my case for the PTA being just a part, albeit a critical part, of the
entire process for me.
The next commentary will be next weekend's edition,
posted by Sunday, June 26, 2005.
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