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Saturday, March 07, 2009

Saturday roundup

The "top out" pattern has been the setup of choice for the past quarter, for obvious reasons. To me the classic top out pattern is long upper-tails forming on the fourth and fifth bars, but failing to close above the OR (opening range) high. The smaller the real-body and closer to the actual OR high, the better (we will call this v1).

But a variation that has been working just as good - if not better - is when the third bar closes below the halfway point between the OR high* and the 50% retracement. If you look at charts posted over the past few weeks, you will see several examples of this variation (we will call this v2).

*note - I use OR high and morning's high interchangeably; moving forward I am going to [try and] use OR high as I have historically done.

Another variation that has been working well - but I have not tested over an extended period of time - is weakness in the first few bars and the inability for them to close above the halfway point between the OR high and the 50% retracement (as opposed to v2 cited above where price will close above the halfway point and then roll over to close back below it). Psychologically it makes sense, as it is working on the same principle - an early rally that fails to break through to a new high and begins to show weakness. I need to research the profit potential, though (we will call this v3).

With v1, the setup forms close to the morning high and I am looking for an initial move to the 50% retracement; I watch price action at that level to see if it is stalling or will continue down. With v2, I am looking for an initial move to the halfway point between the 50% retracement and the OR low (so, from the upper halfway point to the lower halfway point). With v3, I am looking for an initial move to the morning low and then I watch price action to see if it is stalling at that level or will continue down.

One of the drawbacks of v3 is that the entry is usually just above the 50% retracement; the rationale is that the weakness noted above offsets that drawback...but more testing is required to see if it happens consistently. Here are a few examples of v3 (entry was a break of the third bar low, exit was the FE):

Here are a few examples of v2 (entry was a break of the third bar low; exit on MRO was the FE, exit on BUCY was the halfway point between the low and the FE. Note that MRO presented a "beyond the FE" setup around Noon):

Here is hoping that next week will bring more long setups!



Charles said...

X, was there a valid beyond the fibonacci extension setup on NUE?

Thanks for the post!

King Short said...

You left a lot of money on the table in most of those trades.

Trader-X said...

Charles - I could see a case...but for me, there wasn't a great setup.

King Short - ok, but I made a decent amount on all of them too. It is hard to get the exact top and bottom...I have a defined profit target and concentrate on being consistent. For every trade that goes on to huge gains after I exit, I can show you three that reverse within .10 of my exact exit point.

Thanks for reading.

loanme5 said...

Hi X,
Thanks for everything that you do. Please ignore the one a-hole that's always looking to poke holes. (A-holes get lonely.) 99% of us appreciate the million-dollar education you are GIVING AWAY.

Anyway, I still use 15 min charts. Since that is where I started with you. I noticed that the FE on a 15 min chart was right at the overall low for MRO. But on POR, the high was exactly at the 10 minute FE.
Would you advise against using one time frame for entry/risk and another for exit/reward?
Or am I just chasing success?

DEM said...

Hi X,

Thanks again for another great post. I would like your views on CMA, 10mins, march. 6th. It looks like a V1 on the 5th bar. But one may argue for a long position above the 4th bar.


armo70 said...

Hi X
great post again - thanks

Once a position moves in your favour, do you tend to move your initial stop to break even? and if so how soon?

I know this is more of an art than a science, but I find this quite hard to judge sometimes, my head tells me to leave some room to let the price bounce around a bit, but I think it's human nature to want to protect you proft as soon as you see some money on the table, And I think I am sometimes too quick to move my stop levels when I'm in profit and sometimes I'm stopped out needlessley.

Do you have any hard and fast rules for management of stops once the position has moved into profit? i.e. wait at least a certain time or maybe wait untl the price has moved a certain amount? Or do you just leave your stop at the same level as when you entered? Or do you just make a call depending on what the action is telling you on each individual position.

thanks again

Zach said...

Hey Trader-X...

Nice learning site! I am wondering how you find the best of these type of setups in real time given all the stocks out there?

Thanks for such a fun and informative site!

Anonymous said...

Hi loanme5,

If I may comment on your questions, I observe the following:
MRO (short) - Best target was 38% FE using ORH to PDL. The 30min ORH would be the same from the 10min & 15min charts. Also the 15min ORH is approximately the same as 30min ORH in this case.
POR (long) - Yes, the best target was 38% FE using 30min ORL to ORH.

Smaller targets and larger targets have less to do with barchart timeframe and more to do with choosing the appropriate reference points (PDH/L, ORH/L, etc). On Friday, the key was that the broad market was in a down trend (except for the last 45 mins). So, shorts hit wider targets and longs hit small targets (if any). Hope this helps.

Anonymous said...


If I may comment, CMA on Friday was actually a v3 top out pattern. On the 10min chart it never closed above the 75% level (halfway point between ORH and 50% Fib). It also has long tails on bars 3-5 and thus the characteristics of was X calls a classic top out pattern. However, the classic top out typical has closes above the 75% level.

dem said...

Thanks Jim. It does look like a v3.

Anonymous said...


Can you please elaborate more on the MRO Fib lines (what are the white-dash lines, black solid lines, and colorful--green, red, blue, yellow--lines each represent)? How many days do you draw for each Fib retrace/extension?

I am trying to replicate your Fib lines and having some problem.

Thanks for the post.


Trader-X said...

Brandon - I detail every aspect of how I trade and plot Fib lines. Start by clicking the WELCOME link at the top of the page and reading those posts.

If you still have questions after that post them here and I will answer once I get caught up. Thanks for reading!

Trader-X said...

Mark and others - I am behind on comments but will try to answer after the market closes today. Jim - thanks for the great insight and analysis!

Brian said...

Great post. I've been watching SPY for the last couple of weeks and have noticed these same variations.

I guess today could be considered a V2 as both the 2nd and 3rd 10min bars closed below the ORH and 50% retracement. However, it never sold off and just rallied all day. How would you interpret the doji on the 3rd bar? Do you see that as a sign of continuation or reversal?

I'm trying to study charts naked (not literally) but without other indicators. My gut tells me is that if I incorporated other indicators to gauge market strength (tick, trin, etc..) they would have screamed long.

Trader-X said...

Brian - even though the second and third bars closed below that halfway mark, price never broke the third bar low so a short entry would have never been triggered.

Trader-X said...

BTW - if other indicators work for you, by all means use them. I just find them unnecessary for me...but I don't assume others feel or trade the same as me. In fact, I advocate they don't! You need to develop and execute your own system using the knowledge you gain from others.

Brian said...

Thanks. You could argue that your style is a simple break out strategy with some candle stick analysis, right? It seems you're just measuring strength/weakness based on candle formations at/and around support resistance zones.

I get hung up on when (what candle)to actually take the trade on. When would you have entered this trade and why?


Brian said...

I will eventually go back to using some indicators to aid in my trading. However at this point in my "career" I want to develop a solid foundation of price action alone.

Trader-X said...

Mark, it took me a while to address this question because I was going to make it a post...but if I keep waiting you may never get a response!

The bottom-line is that it is an art. When I used the previous day's high/low and moves took longer to unfold, you often saw price retrace to your entry after putting up a solid gain. For some people, that is hard to take. Now with my setups that unfold quicker (using only the day's range), that doesn't happen as often - but it still happens.

In general if it is a solid setup I try to leave the stop at the initial level...that gives the trade room to move. But, if price hits a resistance level and prints a bearish candle (for a long entry), I will take that opportunity to protect gains.

I will make an effort over the next few weeks to talk more about this in the charts I post. I don't think I can ever give a clear, decisive answer as a lot of it is just experience from a decade plus of trading, looking at 10s of 1000s of charts, and trading a lot of setups.

armo70 said...


thanks very much for the response - I just want to say you provide a great service on here,