How do I start? Profitable Trading

HOW DO I START? 

          First, I need to structure my computer and my charts to a format that is conducive to day trading. For stock index contracts, I watch two “like” or “tandem” markets in two time periods. These are the CBOT mini-Dow and the e-mini-S&P. Lately, due to client requests, I have been alerted to trading the Russell 2000 and the German stock index Deutscher Aktien Index, known as the DAX. The DAX, an index portfolio of 30 German blue-chip stocks, opens at 3 a.m. (ET) and closes at 11 a.m. (ET). (On a side note, as of October 2006, the DAX, based in Frankfurt, Germany, will start accepting non-German companies. In order to qualify for the Index, foreign companies must conduct their operations in Germany.) The DAX 30 actually tracks close to moves in the S&P 500 futures. In spot forex, I use the euro and a like market, such as the British pound and the yen.

For day trading, I use the 5- and 15-minute time periods. All of my chart screens look the same: The 5-minute e-mini-S&P and the mini-Dow are on the top, and the 15-minute S&P and mini-Dow are on the bottom. All my chart pages are set up this way; therefore, all chart pages are synchronized so that I do not watch different time periods when switching from one screen to another—I have a uniform setting.

• I find the most reliable day trade signals are confirmed in the 15-minute time frame and triggered in the 5-minute time period as well.
• When both time frames are in sync with each other and when like markets have similar signals, this generates a higher probability trigger.

As I stated earlier, the parameters I use in this book are a variation of what is programmed in my proprietary library with Genesis Software. This is a system that generates buy and sell signals based on the principles we have gone over in the book so far. More information on this software can be found on my web site at www.nationalfutures.com

Figure 6.14 illustrates how I line up the e-mini-S&P with the mini-Dow side by side with the corresponding time periods of 5 minutes at the top and 15 minutes at the bottom. Stock and forex charts are lined up the same way.

The greatest feature with this software is that it highlights a sell signal with a red triangle pointing down, and it signals a buy trigger with a green triangle pointing up. These coincide against resistance levels to sell and support levels to buy. As you can see, the sell signals when aligned against the pivot point resistance numbers offer a fantastic visual confirmation based on my predefined strategies; therefore, it will help eliminate the emotional element and impatience of acting on anticipation rather than on a true signal.

All the signals and methods covered in this book can be applied with most charting packages. In fact, 26 years ago, I was calculating the pivot point support and resistance numbers with a handheld calculator. The pivot point calculator is available on my web site. In addition, this book comes with a CD (compact disc) that has a pivot point calculator as well. All that needs to be done is to input the data for the high, the low, and the close; and the R-2 down to the S-2 numbers will be calculated for you. It is very easy to use; all you need are the prices for stocks, futures, or forex markets for any time frame. Figure 6.15 shows the monthly price range for Dell Inc., which I will use to demonstrate how powerful this method of market analysis is when combined with certain candlestick patterns.

Figure 6.16 is Dell with the monthly and weekly pivot support targets indicating a possible bottom. Using the higher time frames, such as the monthly figures, alerted me to a major bottom. All I then needed to do was a high close doji pattern.

The next few chapters will really bring home the message of the value of incorporating pivot points and candlestick patterns. Using the pivot point as a moving average in addition to using the pivot point calculations to identify target ranges will certainly make you a more prepared trader.

This method has captured the attention of many experts who are now using it; and its accuracy at predicting turning points in the market constantly amazes me. Believe me, many people are fascinated by this concept. In December 2002, Futures Magazine first published an article I wrote on the subject, “Combining Cycles and Pivot Points to Predict Market Values” (p. 38), and has published several other articles of mine. Perry Kaufman, the famous technician and author, in the fourth edition of his nearly 1,200-page New Trading Systems and Methods (Wiley, 2005) quoted my work from such magazine articles.

Many other educators have come to listen to me teach, have taught my ideas, and have seen improvement in their students. I have had the opportunity to share my work and research with others, and I would like to share it with you. These trading ideas are not new, and they have stood the test of time.

Here is an excerpt from an online interview I had in February 2003 (see www.nationalfutures.com). The concepts I was talking about then pretty much cover what we have gone over so far and will continue to cover in the following chapters. The difference is that I am going over in detail what the specific signals, settings, and rules are for the trading triggers.

Q: How do you calculate pivot points?

A: I use the traditional formula. To determine current support/resistance levels, the first step is to find the pivot point [PP] number: PP = (H + L + C) divided by 3

The first resistance level (R-1) = (PP x 2) - L

The second resistance level (R-2) = PP + H - L

The first support level (S-1) = (PP x 2) - H

The second support level (S-2) = PP - H + L

Q: What time frames do you apply to calculate the pivot points?

A: I find it extremely important to use multiple time frames in my research and analysis. For those who are familiar with the “numbers” from the pivot point calculations, the idea of applying them from any time period other than the prior day’s session may make little or no sense. However, I apply the daily, weekly, and even monthly target numbers and incorporate these in my traders “tool box.” Often traders will comment, “If I am a day trader, why would I want to be concerned with a monthly or a weekly market outlook?” Consider that in every month, there will be a high and a low, and the close will be somewhere in between. In one week, a high or a low will be established; and in one day of the week, the market will form that point of interest. More often than not, in an hour or so, trades will take place that will establish that high and subsequently that low!

Q: What are the various time periods in forex markets from which you take the data to calculate the numbers?

A: For the daily numbers, I take the New York Bank settlement. For weekly numbers, I use the data beginning from the open on Sunday night to the close on Friday afternoon. Monthly numbers are calculated by calendar periods.

Q: What is the main purpose for using the pivot points, and how can traders use them?

A: One popular application of the pivot point concept is to go long or cover any short positions at either of the two support levels or to go short or sell at the projected resistance levels. Knowing these fixed price levels gives the trader unambiguous points to trade off, to enter, or to exit the market or, more important at times, where not to enter a position. For example, you should not buy right at either of the resistance levels. These levels act as boundaries that can turn back price advances or declines, at least on the first attempt. Another technique is to trade the breakout of the first support or resistance levels. If prices do break through the S-1 or R-1 level, traders have a new target at the R-2 or S-2 level to take profits. The benefits of using the both short- and longer-term pivot points for a short-term day trader are numerous: They give a trader a better edge due to the ability to work with predetermined price levels, which lead to precise entry and stop loss points, all of which give the trader the additional edge in the quest for bigger profits.

Q: You use different technical tools in your daily videos. On which ones do you put more trust or emphasis?

A: Great question! I use stochastics as an overbought/oversold indicator, and I use it to help me determine divergence and convergence signals. I use three-period variable moving averages to help keep me focused on the trend. Moving averages also help me identify potential turning points when the short-term average crosses over or below the longer-term average.

Q: You use candle charts over bar charts. Why is that?

A: Each candle has different characteristics that represent the difference, or the distance, between the high, the low, the open, and the close. These characteristics use colors to differentiate the relationship between the open and the close, referred to as the real body. Candlestick charting acts as an immediate way to illustrate and to help identify the current market’s environment and the current time frame’s acceptance or rejection of a specific support or resistance level in a clear visual manner. If, for example, on a given trading session, prices move higher from the opening price, establish the high, and then fall, the distance formed from those points of interest is called the “shadow.”

Candle charts give me color and depth, which help me almost immediately determine where current prices are in relation to past price levels. Candlestick charting techniques can be used from data for whatever time period you are looking at: hourly, daily, weekly, or monthly. There are 60 to 70 different classifications of named candlestick patterns—from one on up to several candle components. They can signal reversal, stalled, and continuations of a market’s price move. Day traders want to focus on a small arsenal of the more consistent and reliable reoccurring formations. Several patterns that a trader wants to home in on and recognize are the more powerful reversal formations at tops and bottoms of price ranges.

Q: How do candlesticks help you in your trading?

A: My trading approach incorporates time-tested techniques but uses the aid of candlestick charts, which help me identify the true condition of the markets. If you believe market prices are simply the reflection of human emotion on perceived current value and focus on what the market is doing, rather than on what the market might do, then you are ahead of the crowd in understand how markets function. With that understanding, you will then be able to have the confidence to act swiftly and to execute or trigger into a trade or position in the market.

Q: Which do you favor more—fundamental or technical analysis?

A: I watch what reports are coming out, as some can generate wild gyrations (e.g., monthly unemployment report). I rely heavily on technical analysis. After all, it is the purest and most objective study of price action. It is used for expedience. You can review one, five, ten, or even twenty charts in a matter of seconds or minutes to get a quick overview of the general trends. How long would it take to study the fundamental reports on the economy or interest rates in various countries to develop an opinion to buy or sell a foreign currency? That process could take hours, days, or even weeks to figure out. Specific chart patterns and price actions have a high degree of repetition. They are not 100 percent accurate; however, they do have a high percentage of reoccurrences. Success comes in the simple form of managing risk when applying a systematic method to these principles and being able to quickly identify when and why a particular pattern fails.

Q: You learned that certain candle patterns developed near these pivot points. Which ones do you look for near support or resistance levels?

A: Top reversal or bearish, such as dojis, bearish haramis, harami crosses, dark cloud covers, and evening star formations. And for bottom reversal or bullish candle patterns, I look for bullish haramis, harami crosses, bullish piercing patterns, bullish engulfing patterns, or, my favorite, a rare occurring pattern called a morning doji star.

Q: How significant are doji patterns?

A: Extremely significant, especially if you know what to look for. There are specific criteria that dojis need to meet; but if you know what these are, they can be very powerful in helping your trading decisions. Doji formations help confirm reversals. There are different names and nuances associated with certain dojis. Dojis indicate indecision, the market ends or closes, where it began or opened. Dojis signify that confidence is lost from buyers or sellers after the open as the market made a lot of intraday noise as the range during the day was established. In a bullish or bearish trending market, indecision is the last thing you want to see. Strong rejection or failure from the high and/or the low is a significant telltale sign that changes are coming.

Q: What other considerations can you share with us regarding dojis?

A: In a strong up-trending market, usually the market will close near a high, as larger capitalized traders will hold positions overnight. If the large money traders are not confident the market will move higher in price, then usually the market closes back near the open. I find it uncanny how many times dojis form at or very close to the actual pivot point calculated support or resistance numbers. That is what helps me set up my trades; it is the relation of the next candle’s close after a doji that triggers my entries, especially if they are lined up at the pivot points.

Q: What is the shortest time frame that you use for charting?

A: Five minutes.

Q: What other time frames do you track?

A: Besides monthly, weekly, and daily charts, I use the 5-, the 15-, and the 30-minute and even the 60-minute for overnight trend trading.

Q: What is your favorite or most reliable time frame?

A: For day trading, the 5- and 15-minute are equally important; so I watch both.

Q: Do you just use pivot points, or do you use other methods for forecasting support and resistance levels?

A: In my book A Complete Guide to Technical Trading Tactics: How to Profit Using Pivot Points, Candlesticks, and Other Indicators, I demonstrate many powerful ways to anticipate support and resistance levels, including Fibonacci retracement, Fibonacci extensions, and projection methods. In fact, in my trading course, I teach specific trade setups and confirm signals to trigger or execute trades, how to manage a trade, and how to know when to exit or even reverse a position.

Q: What signals or rules do you follow for a trading trigger?

A: Without giving away too many of my trade secrets, there is one that can be found in my advanced trading course—a special trading setup that I look for in a bullish setup.

• When the market approaches a key pivot point, buy on the close or on the next open once a new closing high is made above the previous bullish reversal candle pattern or a doji.
• Place your initial risk-management stop below the low of the lowest low point of the bullish candle pattern on a stop-close-only basis.
• Exit the trade on the close or on the first open of a candle that makes a lower low after a prolonged uptrend, especially if it is near a pivot line.
• One can use a “filter,” or a back-up process, to confirm the buy signal against a major pivot point number, such as a bullish convergence stochastic pattern.

Remember, a bullish candle pattern can be a harami, a harami doji cross, a bullish piercing pattern, a bullish engulfing pattern, a doji, or a morning doji star.

Q: Tell us about this course and book you have mentioned?

A: The book was published by John Wiley and Sons in May of 2004. I put the course together based on several seminars I conducted, one of which was at the Chicago Board of Trade back in May 2003 and then again in December 2004. I had a huge response from folks who could not attend but were impressed with my methods. I offer it on my web site, which is www.nationalfutures.com. Both the book and the course are available on my site, and I do get asked to autograph and add a personal message when these are pre-purchased from my web site.