Sunday, December 07, 2008

DUG Q&A

Q. Thank you Jamie for this excellent post. Very informative for me.

I have a few questions on a double top trade and how you would have traded that. It's DUG (Dec. 5) on a 5 min. chart. It formed a double top around 11.35 at the 50% fib. extension. Would you have traded this ETF based on the chart at around 11.35 (irrespective of how the market was moving). If no, why? If yes, where would you have entered, what would have been your targets at the time of entry.

Also, if the 11.35 candle on the 5 min. chart was a doji or a hanging man - would that have affected your entry point? Any thing that I should remember while taking these setups?

Also, at 10.55, I wanted to draw fib. retracement lines for DUG. I drew from previous day low (from where the leg up started) to the day's high at that time. Is this correct or it should have been the previous day close to the day's high at that point?

A. I would not have taken that trade. I don't really see a double top here, it's much too subtle. The second top is higher than the first and up to that point this stock is on a path of higher highs and higher lows. Volume is higher on green bars than red. More evidence is needed before committing money to this trade.

Just draw your fibs like #2 in the Trader-X guidelines.

Eventually, it forms a bear flag on the retest of the R-zone and you can short it there. I would partial out at ORH and get stopped out, but you can re-enter after the second bear flag breaks below ORH. Use Fib retracement as target. No need to redraw the fibs. in this case.

In my trading, I usually partial at 50 MA on 15 min. as this is usually a support consolidation area.


Also, preference to 15 minute timeframe over 5 min. for newer traders. Candlestick reversal patterns more meaningful on the longer timeframe IMO.

2 comments:

Susan said...

Thanks Jamie. I hardly trade double top pattern and knew from the start that it was not a right trade to enter but the bear flag made me stay in the trade.

I totally forgot to see the volume in the second top. Do you consider the wicks in determining the top or just the closing of the candles?

I got John Murphy's book you recommended. Easy to understand for beginners.

Jamie said...

Susan,

Yes, I like to see some shooting stars with long upper wicks, when I'm looking to exit a top or contemplating a short. At the very least I need a lower high to firm up the downtrend.

I'm glad it worked out for you. The way I trade, I want to get in when the stock is setting up to move quickly. I don't like to enter and then have price move against me, so that's why I caution shorting these types of subtle tops. Shorting a bear flag usually saves you the trouble of going in the red before things go in your favor plus it provides you the added confidence of a lower high.

The Murphy book can be your bible on TA and it has a nice chapter on candlesticks so that you can get a better feel for the key reversal patterns. Don't bother with his Fibonacci chapter, it tries to blend Fibs. with Elliott waves and it's just way too confusing.

Good Reading!