The beauty of this particular strategy is that you don’t even need to choose the direction the market fills you when it goes in the direction that it decides to go, so your only job really is to determine when you’re going to place your trade and of course a little bit about the where you’re going to place your trade. We’re going to address that in just a second.
Here we have the December lean hogs chart, and you can see that lean hogs are obviously in a downtrend. The market has been trending lower and as it goes along here, all of a sudden we have a little bit of support. Now technically this isn’t true support because for support we like to see our red-green bar combination, but I always pay attention when the market does not put in a new low.
Here you can see that on this particular day the low was higher than the day before, and in fact, let me see…what was the open? The open was 66.27 and the close was 66.20 so for the sake of a couple-three ticks, this bar turned red instead of green.
So the next day we do have true support. Now that we have our red-green bar combination, what we’re doing is we’re going to trail our entry. I know I mentioned this particular strategy once before, but we’re going to show you a little bit of a twist on it today.
Now the market is in pullback phase, it has established support so we are going to trail our entry with the assumption that the market is going to re-establish the existing trend, so our our entry is the low of the day before. We’re going to keep doing that so as the market trades higher, we move our entry up a little bit. It doesn’t have to be at the low, ideally we want it a little bit below the low, we don’t want to get caught in the daily market noise.
Okay here comes the twist on this trade. Now that the market has established support with our red-green bar combination and it has established resistance as well with our green-red bar combination, we are going to bracket this trade. So now that we have support and we have resistance we are going to bracket this trade and let the market show us whether it’s going to break support or break resistance. We’re going to trail our entry when and if this market trades lower. It does trade lower, so we’re The beauty of this particular strategy is that you don’t even need to choose the direction the market fills you when it goes in the direction that it decides to go, so your only job really is to determine when you’re going to place your trade and of course a little bit about the where you’re going to place your trade. We’re going to address that in just a second.
Here we have the December lean hogs chart, and you can see that lean hogs are obviously in a downtrend. The market has been trending lower and as it goes along here, all of a sudden we have a little bit of support. Now technically this isn’t true support because for support we like to see our red-green bar combination, but I always pay attention when the market does not put in a new low.
Here you can see that on this particular day the low was higher than the day before, and in fact, let me see…what was the open? The open was 66.27 and the close was 66.20 so for the sake of a couple-three ticks, this bar turned red instead of green.
So the next day we do have true support. Now that we have our red-green bar combination, what we’re doing is we’re going to trail our entry. I know I mentioned this particular strategy once before, but we’re going to show you a little bit of a twist on it today.
Now the market is in pullback phase, it has established support so we are going to trail our entry with the assumption that the market is going to re-establish the existing trend, so our our entry is the low of the day before. We’re going to keep doing that so as the market trades higher, we move our entry up a little bit. It doesn’t have to be at the low, ideally we want it a little bit below the low, we don’t want to get caught in the daily market noise.
Okay here comes the twist on this trade. Now that the market has established support with our red-green bar combination and it has established resistance as well with our green-red bar combination, we are going to bracket this trade. So now that we have support and we have resistance we are going to bracket this trade and let the market show us whether it’s going to break support or break resistance. We’re going to trail our entry when and if this market trades lower.
It does trade lower so we’re going to bring our entry in above the previous day’s high. This entry remains the same because this was the pullback move higher so we haven’t moved this. Now we’re getting the move lower so the market is either going to make a big move lower and bring us in on the short side, or it’s going to reverse and bring us in on the upside.
Okay, although the market traded lower, the high is higher than the day before so we’ll just kind of leave it where it is again. We’re not going to crowd this trade too much, you have to allow it a little bit of available room. Here we go, we get brought in as the market trades higher so now we are long on this particular market and you can see, even though I only have a few days to work off of, you can see that it was very effective for bringing us into a market that has changed trend or at least that’s how it looks right now.
You can do this on practically any chart, I just randomly chose the lean hog chart because it was a current market but it’s very effective for a market that has entered a pullback phase.
Let me quickly show you a market that I’m kind of excited about doing this on. Does this look familiar to anybody? look at the rocket ride that cotton has been on, just an insane rally, all the way from back here from toward the end of summer or end of July anyway, the market has taken off and not looked back. Somewhere around here was the big flood in Pakistan, and prices have just shot up every day since then with very little chance of getting into this market.
Oh but look at this, we have entered a pullback phase so here we’re going to do the opposite where we are trailing our entry because we’re anticipating the market to go long. We’re going to trail our entry to the upside, but you know what, we don’t know whether this market has finished the uptrend or not, so once support comes in then we can throw on our sell order.
Let’s assume that support is going to come in here on Monday. Now we can trail our sell order so we have our buy order, our buy order is going to be here above Thursday’s high. Thursday’s high was 140 280. I would not crowd that, I would certainly go on the other side of 143, maybe even a full point – maybe 140 380 – but let’s say the market shows us support. Then we will trail our sell order higher because if in fact the market is not ready to resume the uptrend and it reverses and heads lower, then we’ll be able to capture it to the downside.
So, a very, very powerful trading strategy. You do not need to choose the market direction, you only have to pay attention when is the proper time to apply this technique and to have the nerve to see it through… and that is this week’s Tricks of the Trade.
This content was first published by Erich Senft on supportandresistance.com in 2011 as part of Tricks of The Trade.
