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Wednesday, March 17, 2010

HOW TO TRADE MOONSHOTS

Now that we are in the midst of a runaway bull market in stocks, I thought I would review a couple of ways you can trade these types of blowoffs


This chart is Cotton but shows the same type of market characteristics that the SP500 and all the other indexes do right now. We are climbing very sharply with virtually no pullbacks at all. I have marked off 3 different buy spots on this chart.

The first one is the dreaded Reversal Bar. This is basically a bar that trades above yesterdays high then closes below the prior days close. Much has been written about waiting for these bars then trading against the trend when they show up. This does not work, and any book you read hyping this you should immediately put back on the shelf at the book store. The best way to trade them is to buy above their highs the next day if they get taken out. This first entry shows that and worked quite well.

The second entry is just a decent one bar pullback. The entry would just be above the high of that bar. These are very difficult trades to take when they show up because after seeing a sharp rise, we always think it will retrace more. The best trends do not retrace much. Here you can see the liftoff we had after just one bar down.

The third entry is basically what is referred to in Candlestick charting as a doji bar. This is basically a bar that closes very close to it's opening. These indicate indecision, so a breakout of these bars is often a short term momentum burst. Larry Williams calls these blast off bars. You can call them whatever you want, they do work nicely in situations like this. Breakout from these indecision bars work quite well in the direction of trends.

So there you have 3 possible ways of trading these sharp up moves like we are seeing right now in stocks. Do they always work? Of course not. Trading is a probabilities game and when in the midst of a strong trend move and you see one of these three situations develop, the odds will be on your side for a trend continuation, and that is all we can ask for.

A little housekeeping. I had mentioned during the down day here due to a power failure, that I had shorted Crude and a few stocks. The Crude trade wound up as a scratch after having a gangbusters first day, then sharply reversing and going back up again the next day taking me out where I entered. My stock orders have not been filled on the short side yet. I sell below the market and we just have had no dips in all of the individual stocks I had orders in for.



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