"As you noted in a past post, I trade reversion to the mean type setups and I don't use Fibonacci lines often (though I use them some). Basically I look for a strong gap up or down with a lot of white space between current price and the 8EMA. I look for a signal using candlestick charts (and my experience interpreting them), and usually exit when price moves back to the 8EMA.
I also trade longer timeframes - predominantly 30 minute charts. I find that the setups for these types of trades work better on longer-term charts. They do work on shorter timeframes as well, but there tend to be a lot more failures.
A few more tips: movement is key...don't take setups that are in a range. Wide range bars followed by reversals work best (see example 1 below), or an obvious movement out of a trading range (see example 2 below). But, trading a signal that doesn't move out of a trading range (ie, forms in consolidation) is a recipe for disaster. Also, I don't enter trades much after the first three hours, and I prefer setups that work off a gap as opposed to just a sharp move that creates a lot of white space.
Here are two examples from Friday:
GDI - very wide-range first bar. Narrow range 2nd bar. Entry on a break of the 2nd bar high. I closed the position 3 bars later - just shy of the 8EMA - after the 3rd-5th bars all left upper tails. "
"GSVC - this setup represents a movement out of a trading range, in this case a trading range formed by the 2nd-3rd bars. The 4th bar was a strong move up, and the 5th bar was a strong hammer. I entered on a break of that bar's high. I closed the position when price rallied but fell back below the $16 whole number mark."
Be careful with these types of setup - it can be like trying to "catch a falling knife" (for a long entry) or "stepping in front of a moving train" (for a short entry). There is a lot of risk, but if you know how to read and interpret candlestick charts there is a lot of potential. Let me know if anyone has questions.
X note - I marked Michael's trigger bar with an arrow; the entry was a break of that trigger bar's high.
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20 comments:
Interesting trades Michael. Do you short the opposite type setup, or do you only trade these long?
John
Hi John. Yes, I short stocks as well. The same tips I listed apply. CIE was a textbook example from Friday (note, I did not trade it). The first 2 bars were wide range compared to the action of the previous days, a lot of white space, enter on a break of the 3rd bar low.
Thank you much Michael! I'll check these setups out this week.
John
Nice trades. Thanks for a new point of view.
Nice trading Michael. I noticed you have pivot lines plotted on your charts. How do you use them?
Michael,
Where are you putting your stops?
Thanks
Michael, great stuff. Hope you keep posting. Where do you set your stops? Also, using a 30 minute timeframe and dealing with wide range bars how do you handle your money management rules? Thanks again Michael.
Hi Daryl. I didn't talk about pivot lines and I use them more as a guide than any fast and hard rules for my trading. I like big gaps, so they will usually be above or below R2/S2 (or, on X's chart, the yellow horizontal lines). But sometimes you have a nice gap that leaves a lot of white space between price and the 8EMA, and finds support/resistance for a reversal at S2 or R2.
Hey guys, regarding stops - it is usually the opposite extreme of the trigger bar, just like normal X setups. The only exception is if there is a previous pivot that makes more sense...but 95%+ it is simply the opposite extreme of that trigger bar.
On money management, I have a specific dollar amount I risk on every trade, and I adjust my position size to fit that...so I take my fixed dollar amount and divide by my total risk (entry minus stop) to get my position size.
thx for posting your trades and rules.
excellent trades
love to see what others are doing, this is excellent...
Hi Michael,
Great info, thanks for sharing this. Can you describe your search creteria, how much gap you are looking for, etc..
Thanks,
Eddie.
Eddie, I am looking for sizable gaps that leave a lot of white space between price and the 8EMA. If you plot pivot lines, they will usually (but not always) gap above/below R2 and S2. I also like wide-range bars after the gap...ie, movement. I use pre-defined gap lists in my software, but there are a lot of places you can find gappers...I think X has made numerous posts on this blog about that. Thanks.
Thanks for taking the time to keep the thread alive Michael.
I like this a lot Michael, thank you for sharing. I traded CHTP today after researching your setup. I made .25 off of it on a nice size position, so it was a rousing success. However, it didn't hit the 8EMA before turning down. I sold because I took the 5th bar as a reversal signal, even short of the 8EMA. But I was wondering how you would have handled the exit? One thought is that I could use a 5EMA as the target. Thanks again, great post.
By the way, my entry on the chart discussed in the previous post was a break of the 3rd bar high.
Mark, interesting trade. I will just stress being careful not to try and catch a falling knife. I think this was a good setup as it had the one key I look for - movement and wide range bars. However, if it had been narrow range bars after a gap down it would have most likely failed, which is why I stress being careful and only taking the "quality" setups.
Regarding your question, the 5EMA idea is interesting. My only concern is you would be exiting positions early a lot of the time, but if you are basing your exit on good analysis it might maximize potential and minimize risk. For CHTP I agree with your assessment that the 5th bar was signaling a problem, plus price was hovering around that .50 mark (3.50) which can also offer issues much like the dollar level.
All in all, this was a good trade. Glad it worked out.
Nice setup Michael. Spent the past day doing some chart studies for the past 12 months, and it is very consistent provided you don't take the bad setups you point out in your explanation. Thank you very much for sharing.
TT
As a follow up to my last comment, in my research I noticed a gap down that finds support at S2 and has a lot of white space as Michael sets in his criteria has a high probability. Today I traded BBBY which met that criteria, entered on a break of the second bar high that formed on support from S2 with a hammer. Just sold for a .45 gain.
Thanks Michael, this is great information. You are very selfless for sharing, as is X for this entire blog!
TT
PS - hope my explanation of the BBBY trade makes sense. Gap down, strong first bar, hammer like second bar on support from S2, white space to the 8EMA.
TT, I understand the BBBY setup perfectly. Nice trade. I too have noticed the pivot line setups as you point out, and this is great information to share with X readers. Good job and good trading!
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