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

Trade an intraday hook to safe profits

HOOKED ON ENTRIES

“Touch and go” is a six-month chart showing 30-year Treasury bonds represented by ZB, the Globex June 2009 futures contract. On this six-month chart, the strict definition of a trend was met during December 2008, January 2009 and early February 2009. As a swing trader or a day-trader you would have traded the sharpest parts of this six-month chart.

Look at April 2009. Even though price trended lower during April, the action was ragged. Now look at the far right price bar representing April 28. Even though April was difficult to trade using the strict definition of a trend, April 28 did provide a vital clue. Price rallied to the tight descending 10-period moving average then broke abruptly.

“Hooked” zooms in on the April 28 bond action. This 180-minute bar chart covers April 14 through April 28. For a day-trader, there were several times that the strict definition of a downtrend was met, including April 17, April 22 and April 28. By now you have seen one of the secrets of trading an intraday stair. A conspicuous part of a descending stair is the moment price undercuts (hooks lower off) the preceding low. The cleanest entry point in a stair is the hook.

Price may follow through after a hook or it may hook again in the opposite direction. There is no guarantee of a follow through. But by using more than one chart, by viewing price action at multiple levels of observation, you can reach a better idea of the likelihood of a follow through. The six-month chart implied that the break off the tight moving average presented a strong hook. The 180-minute chart reinforced that clue. On April 28, bonds hooked lower on the 9:30 a.m. New York Stock Exchange (NYSE) opening bell. Price ran lower right up to the 4 p.m. NYSE closing bell. April 28 presented a safe profit for bond bears.

GO SHERLOCK

As a trader, you are a detective. The more clues to your mystery, the better. “Really hooked” zooms in tightly on the April 28 bond action. This 10-minute bar chart covers the time between the 9:30 a.m. NYSE opening bell and the 4 p.m. NYSE closing bell. T-bonds can be strongly influenced by the direction of equities and vice versa on a minute-by-minute basis. The most liquid time to trade equities is during NYSE regular hours. Focusing on the behavior of bonds during NYSE regular hours can provide vital clues to the next move in bonds.

Notice how bonds trended lower below a descending five-period moving average. Toward the middle of the chart, price hooked sharply lower. This is a phenomenon of one-day trends. Price will tend to run, then move sideways, then run again. Watching for the second run can prepare you for the move. If you missed a day’s initial hook, you may be presented with a second.

Keep in mind that the clues on every trading day do not line up as neatly as these examples. Your job is to wait for the days when they do line up and then act. Don’t force it.

Strictness increases safety but decreases tradable opportunities. The success of the hook/stair trading strategy depends on discipline. Consider the amount of choppy action and the number of false hooks in the examples. A false hook quickly reverses. This is part of what makes the hook/stair strategy challenging. You have to pick out the good (strong hooks) from the bad (weak hooks). Strong hooks are corroborated by multiple clues.

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