Buy Support, Sell Resistance

BUY SUPPORT, SELL RESISTANCE         

Throughout this book, I have made many references to why I look for buy signals at the predetermined pivot point support levels and take sell signals at predetermined resistance levels. This also falls along the lines of not knowing the outcome of the trading signal and market trend conditions, which can and do change. As a day trader looking to capture a portion of a day’s potential trading range, you have to use a plan. Scaling out of positions is such a plan of action. Take a look at Figure 10.5. We have a spot forex euro currency versus the U.S. dollar. Notice that the market breaks below the targeted pivot point support several times; however, prices do not seem to decline very far or carry any momentum. In fact, a low close doji pattern develops, which means, if you follow my rules, you do not take sell signals at support. This helps filter out the false trading signals. Once we have a high close doji trigger to go long at 119.83, we now can place our stop and follow the developments as the trade matures. We see higher highs, higher lows, and higher closing highs. The market closes closer to the highs of each successive candle, and the closes of each candle are above the opens. These are all very bullish signs, and the market blasts beyond the first resistance (R-1) point. So far, we do not have a reason to liquidate the position or scale out of the trade. Then as the market trades at the R-2 level, we see a doji form; and that will be the clue to scale out of half of the position near 120.20. At this point, we trail our stop on the balance of positions to the low of the last conditional change candle, which is the one that made the last higher closing high. We do get knocked out of the trade, as the market develops into a consolidation phase.

This trade resulted in capturing a nice chunk of the middle of a beautiful intraday trending market condition. Scaling out of the first half of the position would have generated a 40-point profit, or $400 per $100,000 contract lot value; and the balance would have made nearly 30 points, or $300. There was little to no pressure once the trade was initiated. Pivot points helped you target the entry and scale out of the exit. As an interesting note, remember the statistic that stated that dojis form close to the highs and/or pivot point resistance levels. Figure 10.5 is just another chart to help visually validate that claim.

Most people use scale trading as a means to stagger positions to enter as well as exit a market. There are many variations and specific techniques. It can be argued that rather than scaling out of half of the positions, you should actually add on to trades to really pyramid profits. I personally do not use this style of trading. I encourage you to explore any and all methods, but I like to stick to the methods that work for me. When I have a projected entry price based on pivot point analysis, I never have a “guaranteed” profit until I liquidate the trade. By scaling out, it is the finest method I know of that puts cash in my account while allowing me to further participate in gains on the balance of positions.