by Lee Gettess
Here is how you actually go about locating your entry into a trade: Set up a chart for the market you wish to trade, utilizing whatever time frame chart you are comfortable with. The more active and volatile a market is, the more profit opportunities will present themselves. Make sure the chart has your oscillator (25/175 with a 20-period moving average), as well as a 7-period exponential moving average of price.
The first thing to look for is the position of the oscillator in relation to the moving average. If the oscillator is above its average, you are looking for long trades. If the oscillator is below its average you look to go short.
If looking to buy, look for price to trade above the most recent swing high on the chart. Once it has, begin measuring the distance from the most recent swing low up to whatever high the market has made currently. We are attempting to anticipate the creation of a new swing high, but you must begin your measurement before the actual swing high is recognizable. Markets move so fast, that price may come down to your potential buy area before you realize that a new swing high is in place! So, you measure the distance from the last swing low up to the price that you believe may be creating a new swing high, and you calculate 38%, 50% and 62% of that distance. You simply multiply the entire distance by .38, .5 and .62. Once you have these three percentages, subtract them from the potential swing high to locate the appropriate retracement levels. You will look to buy at the highest of these levels that is less than or equal to the 7-period exponential moving average.
That last concept is important, so let’s restate for clarity. You want to Buy at the highest retracement level possible, provided it is at, or below the 7-period moving average.
The procedure for selling is reversed. You must have an oscillator that is below its average. You look for price to begin trading below the most recent swing low, then begin measuring from the most recent swing high down to its low. This is the low that you are anticipating will form a new swing low. Calculate 38%, 50% and 62% of this move by multiplying by .38, .5 and .62 then adding these percentages to the low to locate your sell areas. You will look to sell at the lowest retracement that is greater than or equal to the 7-period moving average. Again, this retracement is the lowest one that is still at or above the moving average. That is where you want to sell.
These entries can be amazingly accurate. In fact, they are often traded exactly to the tick, then go flying away. For this reason, it is a good idea to place your actual orders one tick in front of whatever your calculation has given you. If buying, your order should be to buy one tick higher than your calculation with a limit order. If selling, you want to sell one tick lower than your calculation with a limit order. Depending on the time frame you are trading and your ability to follow the market closely, a potential alternative is to simply watch the market trade to your price, then pick up the phone and buy or sell at the market.
Trading at the market insures that you are not waiting for a call from your broker to see if you are filled. It also provides certainty that you are in the market and won’t miss a major move. The biggest deterrent to trading at the market is that your trade location will sometimes suffer. That is, you may wind up buying a couple of ticks higher than you wanted to, or selling lower than expected. That is not a very large problem with these entries, however, since you are buying as the market is dropping and selling as it goes up. You will be pleasantly surprised at how good your fills may be, particularly if your timing is good. It requires more work on the trader’s part to trade at the market, as you certainly must remain on your toes, but it can be rewarding.
The other interesting thing about these entry points is that they often provide at least a bounce in your direction even when the market doesn’t totally reverse its course. For this reason, you should be relatively impatient with these trades. If a trade is going to work well in your favor, it is rare for it to trade back and forth around your entry point for very long. If you haven’t seen at least a small profit after 3-5 price bars have completed after your entry, you should think about exiting the trade. 3-5 price bars is a fairly good measurement to use, whether you are trading off of 5 minute charts, weekly charts, or anything in between. It is good on monthly charts too, for you Rip Van Winkle type traders.