Pivots

Because I do not have the advantages of trading on the floor, I am forced to compensate for the disadvantages of trading from a live data feed. I mentioned this in an early chapter of this book.

I noted I could not utilize the same pivot points that were used on the floor because of the time delay my trading must incur as opposed to the true real-time trading that takes place in the pit.

Now here is my version of what is happening - this is what I visualize is taking place on the floor.

When I see groupings of opens, closes, highs, and lows, all in the same place, at the same price level give or take a tick or two, I feel that these are the natural support/resistance points down on the floor, i.e., places where stops have accumulated. I call them pivots. However, as stated earlier, I cannot trade all of these because prices can move significantly away from these levels from the time I react to what I see, to the time my order is able to reach the floor.

Here is what those congestions look like.

Just look at all the opens, closes, highs and lows clustered a the levels shown by the arrows.

When these events take place near one of my entry signal points, I feel that one of two things is about to happen:

1. The floor will drive prices to the extreme, and then stop there. In other words, prices will test a high or low entry signal point.

2. The floor will drive prices to the extreme and then the public will drive them past the extreme. In other words, there will be a breakout of an entry signal point.

My technique is to straddle these congestions. When prices start to move, I will lose the points the floor traders can make between the center of the congestion and the outer limits of the congestion. I have to give these to the floor due to the time delay I am faced with.

If the floor drives prices up to the extreme and no further, I can expect to make a small profit on distance between the outer limits of the congestion and the extreme that constitutes the point of the entry signal.

What happens at the extreme determines any additional profitability in the trade. It's important to follow closely what I'm about to say.

There must be at least seven to ten ticks between the breakout if the congestion and the extreme for this concept to work.

At the breakout of the congestion, I will typically enter with three contract-sets. As soon as I see an acceptable gain on the trade, I call in my order to liquidate one or two contract-sets. I do this by entering a resting MIT order to take profits per contract at the price level I feel makes the trade worthwhile.

In the situation where I liquidate two contract-sets, I have covered my costs and have earned a small profit. I immediately move my stop to pull the third contract-set to breakeven.

At the breakout of what constituted the entry signal, I will make money as the public comes into the trade.

Recalling that what constitutes an entry signal is a significant event on the daily chart, there is a reasonable expectation that at the breakout of a trading range, a 1-2-3 high or low, a Ross hook, a ledge, the highest high or lowest low of the last three days, yesterday's high or low, etc., there will be an entry into the market by the public - daily traders, and daytraders. Their entry into the market will drive prices further in the direction of the trade in which I am already positioned. Their entry will give me profits on some of my contracts, provided I'm still in the trade and have not been stopped out of my third contract-set when I protect it at breakeven.

There will be a significant number of times I will be stopped out at breakeven on the third contract set. That is not a problem. I don't have to hit a home run every time I step up to the plate. I will at least have covered my costs and made a small profit. I will be alive, and ready to try again at a later time.

When I see another acceptable amount of profit on my third contract-set, I will move my protective stop to lock in at least fifty percent of my unrealized paper profits. Most times, this stop will be taken out soon after placement. I am happy with this situation. I do not fret over what I could have made had I stayed in, or kept my stop further back.

Several times a month, prices will take off and never look back. That is when the market will hand me a large profit. When that happens, I trail my stop, either according to an offset moving average that shows containment, or by placing it just outside of natural support or resistance points. I prefer the natural support or resistance points.

I consider continuation trades at well defined Ross hooks or ledges, but I always bear in mind that additional contracts entail additional risk. Continuation contracts always carry the risk of my losing everything I've already worked so hard to earn.

When the public enters the trade, I have achieved the same advantage over the daily trader as the floor trader has over me. By trading the breakout of the trading range that occurs just prior to the breakout of the extreme (my entry signal), I have in effect faded the daily trader. I end up selling when he is buying, or buying when he is selling. If the entry of daily traders is of sufficient magnitude to drive prices strongly in the direction of the trade, then my third contract-set will reap large profits.

Chapter 22

Managing Your Money At All Ages

Managing Your Money At All Ages

Money management is an art. Sadly, it is becoming a lost art. We are becoming poorer each day just because we cannot manage the resources that we have so painstakingly accumulated. We don’t know how to manage our assets and nurture them to grow.

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