Kane Trading - Education for Serious Traders

					February 2, 2004 Commentary- Today was one of the best days for intraday trading the ES mini that I have seen in a long while. It was better than my wildest expectations, given Friday's rather muted action. Although there were some setups that were just classic to the nth degree, I want to focus on the management end of the trade in today's commentary. Let me start out with my strategy. After Friday's failure to take the market down substantially, and the constant bearish 'we're gonna correct in here now' from every source that I saw, I was thinking I needed to be looking for long opportunities, if I got the set ups. We gapped open, ran up a little, and started to sell down. This was starting to look good for my plan. Then I saw a near perfect 4-Point Continuation Pattern form on the 3-min chart. I checked the NQ and it had one, too. This pointed to possible downside continuation. But we were headed to an area I felt was very critical if they were going to come in for this thing. Now what? This is where I feel I made a great call, as far as my battle plan. I don't like to short just above support. But here was a unique opportunity. I felt that the groupings that I had just below me were very critical. I felt that this was a do or die situation in terms of whether or not we start a more serious correction in here. So I saw a combination opportunity. The 4-Point Continuation Pattern would allow me to take a downside shot with an extra tight stop. I felt there was enough room before the groupings to at least take some off in that area and have a winning, or breakeven, trade, if the groupings held. But if they broke, I was positioned excellently, and I expected the move to be sharp. If the groupings held, I would scale out and prepare to reverse. If they planned to come in, this is where they would do it, and I expected that to be a sharp move. Let me start with a 1-minute chart, showing the 4-Point Continuation Pattern. The arrow marks the area where I went short. I was able to scale out of some of the trade by this point. We are now right on the grouping area. At this very instant the NQ was completing a picture perfect 5-point pattern. Scott Carney over at Harmonic Trader called the NQ pattern completion point with the precision of a renowned, highly skilled neurosurgeon doing brain surgery with a laser scalpel. I knew this was it. The ES and NQ started to rise. I had a trendline on my chart that defined for me the area the ES had to 'take out'. I'll show a 3-minute chart. The arrow points to the area where I went short. At this point I'd been scaling out, so even if the ES went up I was still going to have a winning trade here. I wanted to look for some type of pullback or other entry once the trendline was violated. I didn't have to wait long. I got a perfect pullback and trigger. The second arrow points to the area where I got long. The short was a winner, and I was now long. But the point wasn't to show my trade logic on this sequence (although that in itself is worth looking at), but for me to point out a management issue. Let's say I wanted to let this run, but if I got some profits, I want to protect them. I want to run a fairly tight trailing stop even for my first scale out. In other words, once the momentum slowed I wanted to start taking profits. I might choose a 1-bar trailing stop on the 3-minute (my traded timeframe), combined with a 2 point ultimate trailing stop, in case we get an expansion bar up and then a sharp reversal. (I wouldn't put the 2 point trailing stop into effect until the move had 'taken off' and I had some decent profits on the trade, realized or unrealized. I don't want to tighten up too quickly.) What would have happened here? Without counting inside bars (I don't), the first scale out doesn't happen until the ES has moved 10.75 points off the bottom! This spot is marked by the first arrow at the top right of the chart. The next scale out was 13.75 points off the bottom, and was the final close of the trade also, because it not only broke the 1-bar low, but it hit the 2-point trailing stop. This is a classic example of why I don't like, and rarely, if ever, use, 'profit targets'. But it gets better. This area where the ES just hit completed an ABCD pattern with an outstanding confluence. Although the ramp up made me leery to think about a short trade, the ES behavior soon alleviated that worry. A broad, rounding top started to form, and the ES started to look weak. Being aware that buy programs could hit at any second and that I would have to cover fast, I went short. Since I want to focus on management and not setups, I'll show the entire chart with the final move. The first arrow shows my entry, and the red horizontal line my 1.75 point stop. The second arrow was the first scale out point for a 1-bar stop, initiated once the trade got going. (The pullback before this second arrow was a potential spot to cover a partial position on the weakness, but for me it was too early to use a bar stop.) The 2 point trailing stop would not be in place yet. The third arrow represents where the trade came off on a 2 point trailing stop, which got hit before the next 1-bar high could be taken out. These trades from today are just one case where effective management could have greatly increased the trade potential. Most of the time I don't see runs like this. Many times the results are similar to 'profit target' strategies. I just don't see the downside to managing like this, at least not for my trading, and on rare days like this, the upside is outstanding. I'm showing this today to try to get everyone to think about their exit strategies, and see if techniques like this, right out of Kane Trading on: Trailing Stops, can be of some help.


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