From the September 01, 2009 issue of Futures Magazine • Subscribe!

Trade an intraday hook to safe profits

Sometimes trading is like deep-sea fishing; it takes a strong hook to reel in a big fish.

“Safe profits: Trade an intraday stair” (Futures, June 2009) discusses one technique that relies on a strict definition of a trend. An uptrend is broken down as a series of consecutively higher lows (like an ascending staircase). Go long when you see higher lows. A downtrend is defined as a series of consecutively lower highs (like a descending staircase). Go short when you see lower highs. This trading strategy is best suited to swing and day-traders.

This strict definition and entry rules apply regardless of the bar charts you use to trade. All bar charts show lows and highs. Stairs can appear on any bar chart regardless of the duration of a price bar and the overall time period covered by a chart.

By adding the concept of an intraday hook, you can improve the success rate of this strict process.

PICKY, PICKY

If you review bar charts for this strict definition of trend, you may be surprised about how much action is skipped over. Some traders may chaff at being restricted this way. Why should you ignore what appear to be, even with hindsight, good trends? The answer is contained in another question. How many times have you entered what you thought was a strong trend only to see price unexpectedly reverse or begin churning for an extended period?

Selectivity is a tradeoff in making safe profits. By only going for price action that meets the strict definition of a trend, you gravitate toward the sharpest trends. You will only be in a position during the sharpest parts of a trend. You will avoid choppy price action. You will probably trade less, make more and keep more. You will also lower your stress level.

Exit rules that accompany this approach are equally strict.

If you are long and price undercuts the preceding low, take your profit (or loss) and go to cash. If you are short and price over cuts the preceding high, take your profit (or loss) and go to cash. An alternative is to loosen the entry/exit rules by degrees. You could define a trend using a tight moving average. Ignore price that undercuts a preceding low (or over cuts a preceding high), so long as price does not penetrate the tight moving average. Looser moving averages move you further from strict undercut and over cut rules. Trendlines also are effective. Trendlines tend to be less strict than moving averages. You see what is happening. Risk increases with each step away from the strict definition of a trend.

Part of the challenge of being a successful trader is to pick a strategy before you enter a market then stick with your strategy. Know the pluses and minuses of your strategy beforehand. One of the worst things you can do is start with a trading strategy then follow your
rules arbitrarily.

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