Monday, January 05, 2009

Analyzing the Trades -

A reader submitted the following four trades and asked me to analyze NOC and PHM for possible tips on how to pick good setups from mediocre setups in real time. He trades on the 10 minute timeframe, so all the charts are displayed on the 10 as opposed to the usual 15 min.

The best setup, IMO is the BTU because we have IBs, green on green, in the upper half of the ORH with the PDH holding as support, so I would rate this setup as A+.

The only thing I don't like about ANR, is the entry occurs in the R-zone (retracement zone), which is often a consolidation area. I had ANR and ACI as early leaders (outliers) on my watch list, and I decided to go with ACI (break of ORH at the whole $ level). The entry point is a good distance away from the Fib. extension (R-zone) of the PDL to the ORH . ANR had bigger relative volume, but I thought ACI had a better base and higher chance of running given the distance from the R-zone.

The opening range for NOC is very wide, so I would place my Fibs from the ORL to the ORH and extend from there. Price consolidates in the upper third of the OR and breaks out. The entry is good, but shortly after breaking, price stalls. The doji shooting star is a red flag and I would take some money off when price moves below the low of the SS. The trader in question, tightened the intial stop and was stopped out as depicted in the chart below. If the inital stop plus 2 cents had not been tightened, it would have held as support.

The only thing I could add as a secondary strategy, you might want to take half off after a shooting star and leave the balance with the original stop.

The PHM setup is my least favorite of the four trades. Not only does it execute in the R-zone, but it's also less orderly. However, it does have decidedly more volume on green bars than red, so there's a strong bias towards a continuation long.

If price moves out of the R-zone and immediately reverses back in, it's a red flag - keep it on a tight leash. In this case, PHM carved out a dark cloud cover candle and retraced quite sharply. If you're using intraday pivots, price popped above R2 and couldn't hold it, so time to take some money off to protect capital.

PHM eventually carved out an ascending triangle with a low risk entry and had a nice run.

In summary, I would say that the trader had a good day, despite a 50% stop out rate on the morning trades, the winners both reached the 100% Fib. extensions and the stop outs were managed for minor losses. The only caution I would stress is picking spots away from the R-zone unless the setup is otherwise perfect like ANR.

Related Post: Understanding Fibonacci


PDT said...

Hey Jamie, its been awhile for me. I see your # of feedburner readers has increased by a good 25-30%... wish I could get returns like that ;)

Checking out some of your last few posts I noticed you've introduced some new terminology since I last remember.

For example, you keep referring to the R-Zone (retracement zone). Can you maybe elaborate on this? Is this in reference to a BO from the PDH? In BTU I see the first bar break the PDH but then retraces back to the PDH thus offering a nice low risk entry because this level has been broken and subsequentially tested. Whereas the other charts the PDH is taken out but there is no retesting of that level so there is greater risk. Is this along the right lines?

And one other question. I also noticed from these charts that it seems you plot lines from the PDL to the PDH for your fib extensions. If I remember correctly you used to plot from the PDL to the ORH, Trader-X style. Is this something new and if so why the change?

As always thank you for your insightful posts and for your time answering long ass posts such as this one!


Anonymous said...

Hey Jamie,

Great analysis for the READER and the readers!

Jamie said...

Hey PDT, welcome back.

I've added a link to a related post at the bottom. The retracement zone is the 38-62% retracement area. The related post has a link to Trader-X which explains how to place fibs depending on how it opens. Placement from PDL to PDH is used when the open is within the previous day's trading range.

Jamie said...

Thanks Jim,

What software are you using for scanning RC?

PDT said...

Thanks for the links!