Pitchfork

Predicting Market Behavior…Blindfolded! (Part 5)

2009-07-28T18:53:00.000-07:00

Predicting Market Behavior…Blindfolded! (Part 5)

Many of you have probably guessed that this was a series of daily bars of the Dow Jones Industrial Index. This last chart shows the action through Friday, February 27, 2009. You can see I marked what I consider to be the probable path of price with a set of thick green lines.

When I speak of the Dow falling to 5500, I can see the fear and shock in people’s eyes. At a recorded interview at the November 2007 Traders Expo, with the Dow right at the 13,000 area, I told Tim Bourquin of MoneyShow.com that my charts showed the Dow would likely break 7,500 within 18 months. Fifteen months later, we are closing just above the psychological 7,000 level on the Dow.

I know what I see in the charts I have presented here. I think it would be best for this country and the world economy for all of our worst fears to be realized quickly. The governments of the world should stop throwing good money after bad and let the Dow and other major indices fall until they find a sustainable level. And then I believe the stock markets around the world would begin a period of range trading, while investors slowly began examining stocks around the world for some signs of stability, and then for stocks that might be undervalued. This purging process is necessary—and once it happens, and once our worst fears are realized, the healing and rebuilding can begin.

My thoughts go out to all of you struggling in these difficult times.

Best,

Timothy Morge

Predicting Market Behavior…Blindfolded! (Part 4)

2009-07-28T18:50:00.000-07:00

Predicting Market Behavior…Blindfolded! (Part 4)

Price had no trouble breaking below the blue, up-sloping lower Median Line. In fact, every rally seems to be met with fresh sellers. Thirty bars later, price has broken below the prior major swing low and shows no sign of climbing back above it.

What is the probable path of price? Is price more likely to head higher or lower?

Price accelerates to the down side. This is a very weak market.

What is the probable path of price going forward?

Have you guessed what market I am charting for you yet? Find out in Part 5!

Predicting Market Behavior…Blindfolded! (Part 3)

2009-07-28T18:19:00.000-07:00

Predicting Market Behavior…Blindfolded! (Part 3)

Now let’s go back to looking at the charts one at a time.

Price has tested the blue, up-sloping Median Line twice. It has also left triple bottoms that will act as support below where it is currently trading.

Where is price headed? Is the probable path of price higher from here or lower from here?

Price was unable to break above the blue, up-sloping Median Line, and after consolidating, it traded lower.

To make it easier for you to see both the up and down side potential of this market, I added back in the red, down-sloping lines and left the blue, up-sloping lines as well.

Price is testing the blue, up-sloping lower Median Line parallel. You can see by the two tests of the blue, up-sloping Median Line that this line has shown us where price should run out of directional energy. Will price stop now at the blue, up-sloping lower Median Line and turn back higher, or will it break through the blue lower parallel and trade lower?

Predicting Market Behavior…Blindfolded! (Part 2)

2009-07-28T18:16:00.000-07:00

Predicting Market Behavior…Blindfolded! (Part 2)

Price is trading right in the middle of the current down-sloping trading range. Price has just left a lower high and I have no indication that this pattern of lower highs and lower lows is likely to be broken.

Then, price breaks above a single minor swing high. To ponder the probable path of price, I make a fresh chart and add a blue up sloping Median Line and its Parallel Lines. You can clearly see price has left triple bottoms below where it is currently trading.

It’s important for me to emphasize that this chart covers the same market action as the prior chart, although five bars have now gone by.

If I completely forget the first chart, it is quite easy for me to ignore the series of lower highs and lower lows that are on this chart. By simply replacing the red, down-sloping lines with blue, up-sloping lines and marking the break above a single minor swing high, I have completely changed the psychology of this chart. If I step back and compare the two, the red chart makes me feel bearish and the blue chart makes me feel bullish.

If I show these two charts to 1,000 traders, a good 90% of them will switch from being bearish to bullish when I replace the red, down-sloping lines with the blue, up-sloping lines, especially after pointing out that price just broke above a minor swing high. Why do these minor changes on the same chart alter their opinion? Let me show you these two charts of the same action side by side so you can see that bringing your opinion to any chart can completely change what you draw, feel, and see.

It almost hurts your eyes to try to see the same visual cues on both charts. That’s how powerful the slope and color of the lines can be!

Humans are visual in nature, and we see what we want to see, so it is vitally important to do our analysis with as clean and clear a mind as possible.

Predicting Market Behavior…Blindfolded! (Part 1)

2009-04-26T22:41:00.000-07:00

Predicting Market Behavior…Blindfolded! (Part 1)

I recently spoke at the New York Traders Expo, and on the flight home, I watched one of those crime lab shows (I think it was called CSI Peoria). You know the shows I mean: the lab people are called in because there are no clues and they find a single skin cell on a gum wrapper. Once they analyze that single cell using their new super computer and its special software, the name of the criminal magically appears and the case is instantly solved. That’s the world we live in, right? High-powered computers running super smart software can make all our decisions simple and flawless. We are surrounded by this message, and pretty soon, we believe it in our hearts and minds.

When I give Webcasts or speak at live seminars, the most commonly asked questions are: What software do I use for charting, and what special indicators do I use to tell me where the market is going? I do my best to answer everyone’s questions. I still do my long-term charts by hand drawing them, and when I use computer charting programs, I use a variety of charting packages because I mentor and write and people like to see my analysis on the charting programs they use themselves.

I don’t use computer-generated indictors to tell me where the market is headed. I never use lagging indicators, and when I use leading indicators (Median Lines, geometric projections, and retracements and simple trend lines), I use them to “frame” price structure. Then I use my mind to sort through the various possibilities, to get a clear, likely path of price. Once I have the likely path of price in my mind, I look to the market to tell me where it is going. The market is always right, so I always trade what it is showing me. Computers, computer-generated indicators, and computer software always tell us what we program them to tell us—so if conditions change or if the premise is incorrect, the computer will give us a meaningless answer. The market is going where it is going, so I spend the majority of my time watching market structure to determine where the market is going.

I want to show you some of my thoughts about a particular market. But to keep your mind open and clear and without opinions, I’m going to show you my work on charts that do not name the instrument, do not give a timeframe, do not give a price scale. In short, I have taken out any of the clues from these charts that would tell you what market you are looking at. If you don’t know these things, maybe it will be much easier for you to see what clues I am looking at and why I think each of the market structures I am looking at are so important. Let’s give it a try, shall we?

This market is clearly in a downtrend. If you look closely at the upper-left portion of the chart, you can see it was in a strong downtrend before it made the current series of lower highs and lower lows.

You can see I have a red, down-sloping Median Line set on this chart, and it’s doing a good job showing me where price should run out of downside directional energy. Price is heading lower, and this leading indicator has marked the probable path of price for me.

More in Part 2.

Timothy Morge

How to “See” the True Message of the Markets (Part 5)

2009-03-30T18:53:00.000-07:00

How to “See” the True Message of the Markets (Part 5)

The probable path of price is becoming clearer to me, but perhaps one more chart will bring it into clearer focus for both the trader and for you:

chart

The finishing touches on this analysis are simple. I mentioned before that when I see that the measured length of the swing from pivots A to B equals the length of the swing from pivots C to D, I find the same tools will give me useful projections of the swings forward in time. On this chart, I measured the upside distance price travelled from swing B to swing C, and then projected that same distance upward from the low made at swing D. If I am correct, the swing currently unfolding to the upside from pivot D will be the same length as the swing higher from pivot B to pivot C. Note that I marked where this next swing higher should run out of upside directional energy, at about $880 per ounce.

I don’t see any sign that the current uptrend is over or nearing completion, so if price pulled back a bit to test the up-sloping lower sliding parallel, and that line held, I would be interested in entering a long gold futures position. Remember that this is the pre-trade analysis, so it is too soon to talk about specific entry prices and initial stop loss orders, but as always, I would only enter the orders if the size of the initial stop loss was acceptable and the risk reward ratio was within my normal parameters.

You can see I added a wide green line that unfolds in a wave pattern to show what I consider to be the probable path of price. Once I add the probable path of price onto the chart, it becomes obvious that if I am correct about the projected price target at $880, price will also be running into resistance at the down sloping Schiff Upper Median Line Parallel—and that Upper Parallel marks where price should run out of energy—a great place to take profits.

I showed you charts and analysis that support both a down side move and an up side move. Remember that this analysis is meant as an exercise to help traders objectively identify market structure and then help them determine the probable path of price.

Let’s see what the gold futures did over the next several weeks:

chart

Price came down and tested the lower sliding parallel, and the key support held at that level. Upon successfully testing the sliding parallel, price turned back higher and made a very quick, nearly vertical run up of over $140 an ounce, right to the $880 per ounce area where I projected and marked the equal measured move. Then, after consolidating a bit, price traveled higher and tested the down-sloping Schiff upper Median Line parallel, where it ran out of upside directional energy.

Do not let your opinions get in the way of your trading! Do your best to do objective analysis, and more importantly, trade the market’s actions, not your views or opinions. If you find yourself getting short three times in a row while the market continues to make new highs all morning, you are trading your opinions, not trading the market’s action. The market is always right!

I wish you all good trading.

How to “See” the True Message of the Markets (Part 4)

2009-03-29T01:44:00.000-07:00

How to “See” the True Message of the Markets (Part 4)

My first comment to the trader doing his pre-trade analysis, once I presented this chart, was that price may have completed its downside run for now, or in effect, completed its journey. I then noted that in my simple swing analysis, price was still in an uptrend. It may turn lower, but on my first two charts, I see no clues that price will turn lower.

Let’s see more of the detailed analysis I presented to him:

Click to enlarge image

Price has fallen in a near-vertical fashion twice on this chart, and there is a tool that was modified to be particularly useful after near vertical falls: the modified Schiff Median Line. If you study the chart above, you’ll see that it is a derived version of the traditional Median Line, formed by moving the original starting point of the Median Line handle horizontally and vertically halfway towards the pivots that form the Median Line width. The easiest way I have found to illustrate the shift of the first pivot is the construction of a box that begins at the pivot A and continues to the pivot B on the diagonal, and by shifting the origin of the handle to the center of this box, a modified Schiff Median Line is formed.

I take the trader’s original Median Line and make it a Schiff Median Line. I chose this down-sloping Schiff Median Line over a traditional Median Line because it adjusts well to the near vertical falls this market has experienced and will do a better job projecting the probable path of price. By modifying the trader’s own Median Line, I also keep him in tune with my analysis, since I am building on his own analysis.

Now I want to consider both the downside and upside possibilities. I add in a blue, up-sloping Median Line and its parallels. As soon as I add this Median Line set, I note that price has violated the blue lower Median Line early on, but has now moved well above the lower parallel. Looking closer, I see that when price violated the blue, up-sloping lower Median Line parallel, it stopped at the down-sloping lower Median Line parallel, where price should run out of downside directional energy. I add in a line parallel to the up-sloping Median Line that goes through the low for this move at the down-sloping lower parallel. All further downside movement should find that this new up-sloping, sliding parallel line acts as support.

More in Part 5…

How to “See” the True Message of the Markets (Part 3)

2009-03-26T03:53:00.000-07:00

How to “See” the True Message of the Markets (Part 3)

Now that I have a general feel for the market structure and the current trend, I move on to more detailed analysis.

chart

click to enlarge image

I add back in the red, down-sloping Median Line and its parallels. By adding in the lines the trader originally used to “see” the market, I have now connected him to his original thoughts and feelings about this market. And, remember that his secondary analysis used geometric ratios as a way to frame his view that this market was experiencing a pullback in a downtrend because price was unable to break above the 61.8% retracement of the swing lower from pivot C to pivot D.

Like all traders, I have my own favorite way to use tools, and geometric ratios are no exception. My favorite use of these mathematical tools is a simple equal measured swing. I simply measure the distance price traveled when it moved down from pivot A to pivot B, then I go to the next major swing high at pivot C and project that same distance. If price moved the same distance starting at pivot C, where would a swing down of equal length end? I find that equal measured swings are often deadly accurate.

Looking at the chart above, you’ll see that the distance price traveled from pivot A to pivot B, when projected from the next major swing high at pivot C, would have given me a probable target for pivot D (well before it even formed) that matched where price ran out of downside directional energy and turned, forming the new pivot. I chose this type of analysis for two reasons: 1) I like using measured swings, and find that they project useful targets for the length of swings; and 2) Because the trader had originally used a Fib ratio to justify his pre-trade view, I used a tool from the same family when doing my own analysis while he watched—connecting him again visually to the work I was doing.

In my general analysis of the markets, I see price unfolding in swings that have a particular frequency or length. And often, these swings can be projected quite accurately if the right tools are used. If I project a measured swing, where the distance from A to B equals the projected distance from C to D, and I see the actual swing travels the distance I projected for swing C to D and then changes direction, I know two things from experience. First, price has probably completed the current swing in that direction, and second, an important high or low has most likely just been made by price because price ended its travel in one direction where it should run out of energy. The swings unfolding in this market will likely continue to unfold in an orderly fashion, and I should be able to project them successfully using these tools.

More in Part 4…

How to "See" the True Message of the Markets (Part 2)

2009-03-22T07:48:00.000-07:00

How to "See" the True Message of the Markets (Part 2)

Many traders feel that Fib ratios offer clues about whether a move higher in an established downtrend, for instance, is a pullback in the downtrend, or whether the move higher is a change in trend to the upside. In particular, some traders view the 61.8% Fib ratio as the dividing line. If price has been in a downtrend and manages to rally past the 61.8% Fib ratio, it’s likely that the move higher is a new emerging uptrend, not a rally in an established downtrend. And you can see on the second chart in Part 1 of this article that this trader was pointing to price’s failure to test or break above the 61.8% Fib ratio before turning back lower as a likely sign that the recent up move was merely a countertrend rally.

The new student then added what he considered to be the most probable path of price. After doing his pre-trade analysis, he had decided price was about to resume the downtrend. With this view in hand, he would be looking for price to test the red, down-sloping upper Median Line parallel after a slight rally. Note that he expected the next rally, the one that might test the upper parallel, to be lower than the prior swing high.

When I work on pre-trade analysis with a trader in mentoring, I am examining the trader’s analysis and ability to “read,” or “see” the market structure clearly. In my mind, I am asking, “Can the trader “see” the market structure clearly? Has he considered both the downside and upside scenarios during his pre-trade analysis? Is he projecting a realistic probable path of price? Is he being objective or is he choosing his analysis to support his view on the market?” Often, the only way for me to determine if the analysis is objective is to start from scratch and do my own analysis, in front of the trader. Let’s see what steps I went through with this trader:

The first thing I generally do when analyzing a market is look closely at the market structure. I want to know the major swings, how they formed, and where the market is currently in terms of swing structure.

On the daily gold futures chart above, I removed the red Median Line and its parallels—and that makes it much easier for me to see and mark the major swing highs and lows. Note that I marked higher highs and higher lows in green, indicating price was in an uptrend. I marked lower highs and lower lows in red, indicating price was in a downtrend. And I marked congesting or contracting areas, where price was making higher lows and lower highs, in blue. This simple analysis gives me a feel for the length of swings for this particular market, shows me visually how price generally confirms trend changes in the market, and of course, it shows the current trend of the market.

All other analysis flows from this simple structure analysis. When I do my own pre-trade analysis on a given market, I may or may not have to draw in these swings—my eyes are well trained at this point, and it is easy for me to see market structure. But if it is a market I am not familiar with, or if the structure is not instantly visible to my eyes, I clear off any lines drawn on the chart and do this simple swing analysis—and the market structure instantly becomes recognizable.

More in Part 3…

How to “See” the True Message of the Markets (Part 1)

2009-03-06T17:49:00.000-08:00

People “see” things all the time. We see a face on the shadowy pockmarked surface of the moon. We see horses and dragons and fairies when we look at the fluffy clouds in the summer sky, and we see crabs and horses and bulls when we look at the pinpricks of light standing out from the pitch black night sky. The problem with seeing things is that we may be projecting what we want to see instead of what’s really there.

Because I deal mainly with technical analysis of the markets, it is important that I do not project my feelings and opinions onto what I see when doing analysis—though that’s often a difficult task. There is real value in the results of objective technical analysis, but there can be great danger if a trader sees what they want to see in their technical analysis.

When I teach students to be better traders in my mentoring programs, one of the things we work on over and over is keeping objectivity in our analysis. I find this is best accomplished by always using a set of tools that you have mastered and know inside and out. And to keep emotions out of the analysis and trading, I find it’s best to develop a step-by-step approach. You’ve heard of “paint by the numbers?” Well, I try to help each of my students develop their own “trade by the numbers” routine; one that plays to their own strengths and avoids their weaknesses.

By laying out a detailed, step-by-step trade plan in writing before the trade begins, each trader has a market map in front of them, and if their emotions start to creep in, or if they lose their focus, they can easily get back in step with their original trade plan because they have it right in front of them on their desk.
The hardest part of any trading plan is keeping your head free from emotions and opinions until all the pre-trade analysis and planning is finished. Think about it: If you begin with an opinion and you are like most of us, you are much more likely to pay attention to the analysis that supports your pre-trade opinion. But opinion-free analysis is a learned habit, so I often spend a good deal of time with traders that are new to the mentoring process going over their analysis while they are still stalking a trade. Let me show you just what I mean:

chart

Here is a chart of the daily gold futures from one of my newer students. You can see that he added a red, down-sloping Median Line to show what he feels is the most probable path of price. If he is correct, price should run out of upside directional energy at the red, down-sloping upper Median Line parallel—and that would be an area where he might look for a high-probability trade entry set up to enter a short position in the gold futures.
Let’s look at the second chart he presented me as part of his pre-trade analysis:

chart

Before drawing in what he considered the likely path price would take, he took the high at Pivot C and the low at Pivot D and calculated the 61.8% geometric retracement (what many traders call the 61.8% Fibonacci Ratio.)

What actually happened?

Tim Morge, a proponent of median lines, history of development

2009-03-05T06:30:00.000-08:00

Tim Morge explains the history of median lines development trading lessons strategies

Five Tips to Help You Start 2009 with a Winning Edge! (Part 5)

2009-01-31T08:01:00.000-08:00

Five Tips to Help You Start 2009 with a Winning Edge! (Part 5)

Find the right tune to dance to when trading.

Now what the heck does that mean?

Do you ever feel like the markets are speeding by you, and you are struggling to find patterns and trade entries, but it’s all just going by you too fast? Or, do you find yourself chewing on your fingernails or squeezing a rubber ball because it seems to take forever for that 20-minute bar to close? You might be doing the right dance to the wrong tune!

Traders are people, and each of us has a different ability to read the markets. Some of us are long distance runners, and some of us are sprinters; some of us are rabbits, and some of us are the turtles. If you are a fast-paced trader that craves action, you will not be comfortable trading off of a 60-minute bar chart. Similarly, if you like to ponder and think carefully about each trade, then trading a ten-tick bar chart of the e-mini S&P will make your head spin!

Markets have personalities in the same way that people have personalities. Some markets are hectic and have large trading ranges each day, while others seem to move rather slowly, unfolding their moves over time. To be successful as a trader, you have to find a rhythm for your own trading that isn’t too fast or too slow—otherwise, you will be out of sync! And of course, each market you trade moves at a different speed, so if you trade three different markets, you may find you are watching a five-minute bar chart of one market, a 2000-tick bar chart of another market, and a 20-minute bar chart of a third.

The key is to get in tune with the market and find a time frame or charting frequency that works for that particular market and is also pleasing to you as a trader. Like the three bears, you don’t want to trade in market conditions too fast or too slow. Instead, you want to find charting frequencies that are “just right” for both you and a given market.

These are five important ways you can improve your trading this year. None of them are flashy—instead, they are simple, common sense ways to approach trading that can make a great difference at the end of each month. Building your own trading methodology is like building a foundation for a house in that you use solid blocks that fit together well. Flashy materials don’t last over time. Use time-tested methods that you have researched and that you know work. Once you have found a methodology that is profitable, don’t give in to the urge to move on to something more complex or flashy. Always remember that the goal for every trader should be to make money consistently. If you have found a set of tools that you are able to make money with, spend time mastering those tools instead of exchanging them for the hot new indicator. Trading is hard work, but if you can master a trading methodology, it can be extremely satisfying—as well as profitable!

I wish you a wonderful and prosperous 2009!

Best,

Timothy Morge

Five Tips to Help You Start 2009 with a Winning Edge! (Part 4)

2009-01-31T07:59:00.000-08:00

Five Tips to Help You Start 2009 with a Winning Edge! (Part 4)

Again, more is often less! I am constantly amazed at the barrage of inflated claims that the average trader has to wade through in their E-mail inbox and the trading magazines they read. For example, I recently received an E-mail inviting me to come listen to a "trading expert" who was going to show me how to catch "all the tops and bottoms." In the same week, I got another invitation to hear another expert explain how he turned $120 dollars into $126,000 in six weeks! And my favorite advertisement from one of the trading magazines features an expert that claims he averages 1,286% a quarter, and "You can, too!" Is it any wonder that the average trader uses too much leverage?

I have the same philosophy that a good friend of mine has when it comes to making money trading: The best way to make a good deal of money trading is to make smaller profits on a regular basis. All the small profits added together will build a huge pile of profits over time. Both he and I are considered large speculators in the markets we trade. I call this type of trading "making donuts" and he calls it "slicing sausage." I don't believe in trading for the home run. If one finds me, I'll take it, but the real money is made by consistently making profitable trades.

Every trader hears the stories of the guy on the exchange floor that made a killing because he pyramided his position over and over. As a young trader, one of my mentors was a gentleman that had "cornered" the copper market several times in his trading career. But one thing is certain about these traders that hold out for the home run profits every time they trade: They don't last very long. At the exchanges, you get to see guys that picked the top or bottom in a given market and rode it for a great ride. And you also get to see them lose all their trading capital the next year, because picking tops and bottoms is not a long-term winning proposition. And worse, using too much leverage always leads to ruin, whether it is by slowly bleeding your account to death or by one savage losing blow to your account.

Don't pay attention to claims that sound too good to be true. Trading is hard work. When you get very good at it, it is often repetitious. Once you find a methodology that works, you hone and master it, and then you use the same trade entry set ups over and over. The profits generated from these repetitive trades go on your profit pile. At the end of the month, you get to be pleasantly surprised when you add them all up.

But if you have one weak moment and put all your capital on one trade because you are convinced it is the "perfect" set up, chances are that all that hard work and all your capital will be gone. And you won't be able to trade any longer-the worst penalty that anyone who loves the markets could be sentenced to. Don't use too much leverage. Instead, rely on steady profits to build your account.

Five Tips to Help You Start 2009 with a Winning Edge! (Part 3)

2009-01-31T07:58:00.000-08:00

Five Tips to Help You Start 2009 with a Winning Edge! (Part 3)

More is often less! One of the most common problems I see in traders when they first start one of my mentoring programs is that they try to watch too many markets. Many times, these traders are struggling to get in the black on a regular basis, and yet, they’ll be trying to learn a new trading methodology while watching fifteen or twenty markets. Unless you are a longer-term position trader, you don’t have the ability to watch twenty markets in real time and give each market the attention it needs. It’s hard enough to learn to juggle three balls with your feet firmly on the ground, but imagine trying to juggle twelve balls at a time while riding a bicycle!

I think that the majority of traders would be well served to find four to six markets that are liquid and have a nice daily range. Rather than overextend their focus, they can then closely monitor the handful of markets they have chosen for trade set ups they know they are capable of trading successfully. Once they have mastered the tools they use to trade, and have developed their eyes to spot repeatable trade entry set ups, four to six markets will present more than enough trading opportunities.

Most traders focus on their winning trades, but all of us must realize that when we lose money, we have to make that money back before we are net profitable. This sounds like something everyone knows, but believe me, many traders just don’t think that way. If I had a dollar for every time a trader told me about their “big trade of the day,” but admitted that they net lost money on the day when pressed, I wouldn’t need to work another day. People remember what they want to remember—and that means they conveniently forget what they don’t like to think about. By looking at too many markets, you may find more trades, but at the end of the day, or at the end of the month, you may be taking less money out of the market. The quality of your trades is much more important than the quantity of your trades.

Five Tips to Help You Start 2009 with a Winning Edge! (Part 2)

2009-01-31T07:57:00.000-08:00

Five Tips to Help You Start 2009 with a Winning Edge! (Part 2)

Always plan your trade before placing your orders. Many traders like to trade “free form,” with no plan. These traders feel they have freedom to react to whatever the market throws their way. But there are two very important reasons why trading with a plan is a better idea: 1) Trading can be hectic, and 2) Trading can be emotional.

If you have an open position and don’t have a trading plan in place, when the market becomes overly volatile, you are left trying to make snap decisions. We have all recently experienced markets that were so volatile that it was difficult to tell where price was currently trading. Trying to make informed decisions and then execute them when the markets are volatile is a losing proposition. This often leads to excess slippage, or a failure to get filled on your orders because the market is moving so fast. And trying to type in orders while the market is moving extremely fast often results in errors. It is too hard to make money trading to give it away to execution errors.

When an open position begins to turn into a losing position, your feelings generally begin to cloud your judgment. Traders start to hope that they can hold onto their positions until the market turns back in their favor. If they have had a few losing trades in a row, some traders go as far as rubbing their favorite lucky amulet or praying to the trading Gods—and I am sure some would make a pact with the devil if they could get through to him! Let’s face it: When your emotions begin to cloud your mind, you don’t make the best decisions.

How can you best deal with hectic markets and the possibility of emotions clouding your judgment? Plan your trades before you take them. Write the trading plan out in detail. You’ll have a step-by-step guide for each trade sitting in front of you. Then simply execute the plan, step by step. By having a plan, you have the security of having the road map right in front of you. If emotions start to creep in and make you nervous, you simply look at the step-by-step plan and execute as you planned it. One of my students calls it “trading by the numbers.” This same plan will protect you if the markets suddenly get overly volatile. You’ll have your stop loss orders in place when you first enter the position, and then it becomes an exercise of following the step-by-step decisions you made before you entered the trade, when the volatility was normal. You won’t be forced to make snap judgments in a hectic market because you have the road map right in front of you.

A bad trade plan is better than no plan at all. With no plan, you are often forced to make snap judgments in volatile markets or when your focus is clouded by your emotions. I tell my students that their focus is at its best when they are first stalking a trade. As the stalking continues, and as the trade opens and unfolds, you spend more and more of your energy and ability to focus. Soon you are trading with half your original energy and focus, and that means you will be making decisions with half your original resources.

And don’t underestimate the value of having well thought out records of your trade entry ideas. If you keep detailed trade plans and records, you will truly be able to treat your trading as the business it is. Furthermore, at the end of each month, you should go over the statistics of your trading. By analyzing your trading results on a month-by-month basis, you’ll be able to see patterns emerge that will help you pinpoint your strengths and weaknesses as a trader. Once you learn to identify your strengths and weaknesses, you will be able to work on improving your performance in areas where you struggle as a trader. And you can play to your strengths by purposely choosing trading and money management styles that work well with your best attributes as a trader.

Every trader in my mentoring programs uses a trade sheet for every trade they take. At first, many find it cumbersome to write out their plan before entering a trade. But once they get into the habit, they begin to reap the benefits of having a detailed road map in front of them as a trade unfolds. And they also benefit from being able to analyze their trades on a monthly basis—which allows them to play to their strengths and work on improving their weaknesses. Begin using a trading plan before you enter your trades and you’ll soon see how much help a road map can be.

Five Tips to Help You Start 2009 with a Winning Edge! (Part 1)

2009-01-31T07:55:00.000-08:00

Five Tips to Help You Start 2009 with a Winning Edge! (Part 1)

The holidays are over and a new year is upon us. We're all rested, recharged, and eager to start trading. Some traders had a profitable trading year in 2008, while some traders had a rough ride. The NFA tells us that 90% of all people who open a retail brokerage account close their account after losing all the money in that account-and the average account is closed before twelve months has gone by! If 2008 gave you a rough trading ride, you may be wondering how to improve your trading this year, and even if you had a profitable trading year in 2008, there are always things to work on to improve your bottom line performance. I thought I'd start out this year with an article that highlights the most common problems I see when teaching traders how to be better traders, either in my group mentoring program or in my one-on-one mentoring program.

Always use stop loss orders! I don't actually see this problem in either of my mentoring groups, because I do extensive screening before accepting anyone for either program-and I refuse to work with anyone that does not use stops anytime they have a market position. But I am constantly amazed by the number of traders, experienced and inexperienced, that don't use physical stop orders (versus mental stop orders or no stop loss orders at all.)

While managing professional traders at a large institutional trading desk in the 1980's and 1990's, I watched some of my best traders literally destroy their careers when they failed to use stop loss orders. They were relying on mental orders, and froze when their positions turned against them. And at the exchanges, a week doesn't go by that someone tells me about an acquaintance that went "tap" because they failed to use stop loss orders. And saddest of all, a young trader that signed up for one of my seminars last year E-mailed me a week before the online event to tell me that they would not be attending because they got caught long in a plunging E-Mini S&P market and lost all the money in their trading account-because they failed to use a stop loss order as protection.

Stops are your friend! They protect you when things go wrong-and keep you in the game! The number one thing I feel every trader must do, this year and every year, is use stop loss orders for protection. I know many traders feel that as soon as they enter a stop loss order, the "players" will find their stop loss orders. And they'll be stopped out of their position just before price makes the large move they were looking for.

With a little knowledge about the price structures that appear regularly in the market, it's easy to find logical areas to place your stop loss orders. These areas act as buffers that stop or slow price's advance or decline before it reaches your stop loss order-unless you have totally misread the market. And if you have misread the market, your stop will be hit, but that will be a good thing, saving you untold amounts of money. If you use stop loss orders intelligently, they can give you protection you must have and still give your positions enough room to mature.

Please use stop loss orders every time you take a position. The markets are always right and none of us can afford to fight the market. If you get stopped out of your position, take a break and refocus. Once your thoughts are clear, look at the charts with a clear and open mind for new trade entry set ups.

To be continue in Part 2 of 5.

Timothy Morge

Don’t Forget to Pack All Your Tools! (part 1)

2008-11-11T16:47:00.000-08:00

Don’t Forget to Pack All Your Tools!

I still remember my father telling me, “You can’t use a wrench if you left it at home, son. Always bring all your tools with you when you go to a job.” My father was a welder. I’m a professional trader. But bringing all your tools to the job at hand is just as important to me, and all traders, as it was to my father.

But when I say “bring all of your tools,” I don’t mean throw every new multi-derived curve fit oscillator whizz-bang on a chart when you’re ready to trade. I mean the tools you are familiar with, the tools you have mastered. And tools you may not think of as tools, like solid money management, risk reward ratios and simple profit target projection tricks that help you lock in profits. Sometimes the best tools are sitting between your ears—if you remember to pack them and then when the time is right, take them out and use them!

Probably the most active market is the cash foreign exchange market. The total amount of currencies traded every day dwarfs the value of all the stocks traded in one day, all the options traded in one day and all the futures traded in one day. In fact, it’s currently officially estimated that the cash volume being traded in foreign currencies worldwide is more than 10 times as much as the total cash volume being traded in all equities [stocks and options] worldwide! Currencies start trading on Sunday afternoon in the United States and trade continuously until late Friday afternoon. And because any time money flows from one country to another, currencies are traded—so there are plenty of opportunities to take advantage all the time in the currency markets.

Let’s take a look at one of the most active currency pairs: The Euro versus the US Dollar. I’ll be looking at simple 20 minute charts that cover the entire 24 hour day. The Euro had been gaining in value against the US Dollar all summer long and then in late July, a sharp sell off began. After several days of sharp losses, the Euro began to regain some ground on the US Dollar. Let’s take a look at a chart of that action now:

The Euro/USD has been in a nice down trend. After a near vertical fall of 133 pips, price has congested a bit, re-tested the low price made during the recent fall and has now begun to make higher highs and higher lows as it heads a bit higher.

I added a red down sloping traditional Median Line drawn from the high of this most recent move down using the latest swing high as Pivot C. This should give me a good feel for the direction of this market. The Median Line is a line of force and it projects forward in time and space the rate of rise or fall of price and the likely path price should oscillate around--In other words, it should show me where price should run out of up side directional energy and down side directional energy: at the Upper and Lower Median Line Parallels.

Now here is a simple yet powerful tool from my toolbox and yet, most traders never bother to use it. A wise and very experienced trader once told me that if people would only look at the projection of equal movements, they wouldn't need any other measuring tool when it comes to price projection targets. By this, he meant simply measure how far price moved on one major leg and when the next major leg begins, measure the same amount and expect that price will make it that far--and if you have the right position, take your money and run! Nothing fancy about this, but it is deadly accurate! In simple terms: The distance from A to B will then equal the distance from D to E. Can it go further? Yes. Can it fall short? Yes. But with solid money management, if you capture these equal movements on a regular basis, you will be taking the 'meat' out of a majority of the large moves 80 percent of the time.

Note that price has NOT moved above the Upper Median Line Parallel, so I am still bearish on this market. It would take several closes with quality separation above the Upper Median Line Parallel for me to consider becoming a buyer.

I simply measured the distance from the last high before the vertical drop began to the low made before price began its consolidation [that was 133 pips] and then went over to the last Swing High "C" and projected that same distance below Pivot C to give me the most logical place price would head to with the highest probability. This is a simple but effective tool. Using the simple assumption that the near vertical fall from Swing A to Swing B was 133 pips and moving over to the current high I am assuming is going to develop into Swing High C, I get a potential down side movement to the 136.35 area. Since price is currently trading near what I consider to be overhead resistance at the 137.50 level there is plenty of room below to capture a very significant profit if I can find a repeatable trade entry to establish a short position with good risk reward and solid money management.

Take the Noise Out of Your Charts to Find Better Trade location!

2008-11-10T01:34:00.000-08:00

Take the Noise Out of Your Charts to Find Better Trade location!

What do major league baseball pitches, houses for sale and trade entries all have in common? Location, location, location! Major league baseball pitchers can hit 100 mile per hour fastballs fairly well if they are thrown over the heart of the plate. But if the pitcher can paint the corners of the plate with 100 mile an hour fastballs, most of the batters he faces will be sitting down grumbling after striking out. Similarly, if you look at two houses that are on the same size lot and are fairly similarly built, the one with the best location will sell faster and for more money. And what's that got to do with trading? If you can clear away some of the noise of the markets and add a few simple tools, you'll find that finding a quality trade entry location is a snap!

The E*Mini S&P futures are notoriously noisy during the US trading day and if you view a 24 hour Globex chart, they have periods of inactivity, which means that many indicators like moving averages and drawing tools like Median Lines are skewed by the passage of time during these dead periods. One solution that addresses both concerns is to use bar charts that are built with price on one axis and volume traded on the other axis: In this case, I have chosen to plot a new bar each time 5000 contracts trades electronically.

Depending on the level of activity of the current conditions, you can vary the size of the volume bars-when price is in an extremely active period, I chart 10,000 volume price bars and when price has settled down into one of those periods where six to eight point ranges are the norm, I generally move back down to the 5000 volume bar size. But either of these choices will do a good job of taking out the noise and eliminating the skewing problem associated with the dead periods in the 24 hour charts of these markets.

Now let's look at an actual trade example, in a step by step fashion, so you can see how I use these non-time based bar charts and incorporate a few interesting twists to help me locate quality trade entries.

Price has rebounded nicely from the 1311 ? lows made early in the prior day's session and is clearly in a strong up trend. Although price is trading well within the blue up sloping Median Line drawn off of the major pivots, note that it has not tested the Median Line or its Lower Median Line Parallel. In other words, the slope of this Median Line has done a good job telling us where price is headed, but these lines are untested! Be careful taking a trade off of them until they are tested.

Now note that price trades higher, making a new high, but then trades below and closes the prior swing low. And since price still has not tested the Median Line, this is a sign of weakness. We've now had three tests in a very confined area that tried to go higher and made little or no progress and now price is closing below prior swing lows! Note that I added a red down sloping Median Line and its Parallels after price closed below the prior swing low. I don't have a trade entry idea yet, but I do now have two signs of weakness: Price is closing below prior swing lows and price failed to make it to the up sloping Median Line [This is referred to as Hagopian's rule] and the combination has me concerned that we may be setting up for quite a large sell off unless price quickly makes some up side progress.

Price now trades lower and tests the blue up sloping Lower Median Line and then begins to form an Energy Coil or trading range. Note that to the right of the current price action, there is an area where two lines of opposing force, one up sloping and one down sloping, meet. This is called an Energy Point and especially when you encounter Energy Points within the vicinity of Energy Coils, you can assume that the Energy Point will act as a magnet to price-It will attract price and drag it towards itself! Looking at the chart, above, you can see that if that is the case, we really don't want to enter a trade until right at or very near the Energy Point, because there is no point in having our capital exposed if price is going to range trade! It's better to keep our capital safe and wait until we have a solid idea where price is heading and when price is going to break out of the tight range.

You can see that price is firmly entrenched in the Energy Coil and seems to be headed right for a test of the Energy Point or where the lines of opposing force intersect. In my research, I see time and again that these areas are where price will resolve its ranging activity, so I am generally willing to wait until price gets to within one or two bars of the upcoming Energy Point before committing capital-because there is no need to expose my capital to any risk if price is likely to remain in a range unless an outside price shock [which would be random in nature] moves price out of the Energy Coil before price and time come together at the intersection of the opposing lines of force.
Now let me show you a neat little way I've developed to help me tell which way price will resolve or move out of an Energy Coil.

Note that in drawing the Energy Coil or trading range boundaries, I've connected multiple tops and multiple bottoms and I've left a few extreme prices on both sides outside the drawn boundaries of the Energy Coil. These extremes are the false breakouts that plague so many traders that try to "out guess" the market by buying breakouts from trading ranges or triangles or diamonds. But they can also be very useful signposts if you have the tools to read them. One tool, the Schiff Median Line, can be used in conjunction with these extremes to give you an idea of the likely direction of the breakout. By using the alternating extreme false breakouts as pivots and drawing in an Schiff Median Line, the slope of the resulting Schiff Median Line gives us a good indication of the likely breakout from the current Energy Coil.
In the prior chart, I used the widest set of extremes, starting with a low pivot.

This gave me a down sloping Schiff Median Line. In this example, I began with the highest extreme pivot and again, it gave me a down sloping Schiff Median Line. Even though I began one Schiff Median Line with a low pivot and another with the extreme high pivot, both resulting Schiff Median Lines are telling me the likely breakout will come to the down side. Neither, tell me when or at what price, but they give me a strong indication that the break out will come to the down side. Now I need price location! And that will likely come at or near the Energy Point where the lines of opposing force meet.

Price has now crept sideways towards the Energy Point and is either right at it or one bar from it. And note that in the past 8 to 10 bars, price hasn't moved much. We've had several closes above the blue Lower Median Line Parallel and several below it-but it's still mired in congestion. What makes me think we're likely to break out now? The proximity of price with the Energy Point! Now that I've sat through the passage of a great deal of time as price re-stored its expended energy, I think the Schiff Median Line tool has given me a strong indication that price will break to the down side, so I am now willing to try to enter a short E*Mini S&P position. I want to sell S&P futures at 1320 ?, right at the Energy Point, and if my limit order is filled, my initial stop loss order will be three ticks above the prior three swing highs, at 1322 ?. And my profit target will be a test of the prior 1311 ? Major Swing Low-I'll put my profit order 3 ticks above this prior low at 1312 ?.

Price comes up and tests the Energy Point, exceeding it by one tick and getting me short in the process at 1320 ?. I always enter my limit entry orders and stop loss orders at the same time and then once my limit order is filled, I first double check that my initial stop loss order is still being worked-If it is, I then place my profit order. So in this case, I am short E*Mini S&Ps at 1320 ? with an initial stop loss order at 1322 ? and a profit target of 1312 ?. My initial risk is 2 ? points and my profit target is 9 points away, so my risk reward ratio is a very nice 4:1.

Price trades lower in an orderly fashion, eventually breaking and closing below the lower boundaries of the Energy Coil.

And after price leaves double tops at 1318 ? and then makes a new low for the move [which means these double tops should draw in sellers should price climb back to re-test them], I move my initial stop loss to a stop profit, 3 ticks above the 1319 lower boundary of the Energy Coil, to 1319 ?.

Price does come back up to test the double tops at 1318 ? several bars later and turns on a dime, telling me that there indeed were sell orders waiting above those double tops [which are now triple tops]. Then price again heads down in an orderly fashion, getting within a point or so of hitting my profit target at 1312 ? before congesting again and then turning higher. But the rally is short lived and price again leaves double tops. Because we have come down nicely and gotten very close to my profit target, I don't want to give away any of my hard-earned profits, so when price makes a new low for the day, I snug my profit stop to 3 ticks above the just made 1315 double tops, to 1315 ?.
Price again makes a new low but then consolidates again, testing the 1315 double tops several times-and each time, there were solid sellers in this area!

Once the buying dried up, price headed lower and soon hit my profit order at 1312 ?. Once I see my price print, I make certain that I am filled on my profit order and then I cancel my stop orders and double check two things: That I am working no further orders and that I bought and sold an equal amount of contracts. It's too difficult to make money trading to give it up to simple execution errors because of sloppiness.

2008-09-24T00:25:00.000-07:00

Identifying Swing Highs and Swing Lows

I always pay strict attention to price formations when evaluating any market. Swing highs and lows are two of the most important formations to learn to identify. Many traders use these areas as entry areas on pullbacks when trading with the trend. Because their orders will be there as a ‘buffer’ to slow the counter-trend rise or fall of price, I often hide my orders above swing highs and below swing lows. But many traders, especially those just learning to read charts, have trouble understanding just what it takes to make a particular high a ‘swing high’ or a particular low a ‘swing low’.

Let’s start out by looking at two types of line charts that show swing highs and lows. By line charts, I mean the actual bars of data are not shown; instead only the extremes of price swings are connected, to give a chartist a clearer picture of the past and current price swings.

The first chart shows a specific method of charting swing highs and lows that was developed by W. D. Gann in the first half of the 1900’s. The second chart shows a more common method of charting swing highs and lows and it is this second method that I’ll be describing in this article. Note that in general, when marking swing highs and lows, I do not specify that X bars have to pass before a new swing high or low can occur. Instead, I let price formations confirm each new price extreme—and that’s the key to understanding what makes the top of a particular bar a ‘swing high’.

Looking at this chart, I have already marked in a Swing High “A” and a Swing Low “B”. And note that price has now climbed above the price extreme I labeled Swing High “A”. Does that make this new high in price a swing high? No, because I don’t yet know whether the new high is in place or if price will continue to work its way higher. In the back of my mind, I should be thinking that price is ‘working’ on a new swing high. But it is not a swing high until a price formation confirms it as an extreme high. It’s not as confusing as it sounds. Let me try to show a better example of extremes that are not yet confirmed by price formation extremes:

Looking at this chart, I see a series of lower lows and lower highs that came after price made an extreme high. But note that price has not yet traded below the prior low [at the far left of this chart]. Nothing yet says to me: “The extreme low is in for this swing!” That means a true swing low has not been put in yet. Let’s look at another example:

At first glance, it looks as if price left an extreme high and then traded lower and most traders would be tempted to say a swing high had just occurred. But is it a swing high? In this case, price made a new high and then came down and is now re-testing the prior low—In fact, at the moment the last bar is part of “double bottoms”, which is an important price formation but cannot be used to confirm a swing high or low. Only a low lower than Swing Low ‘A’ can ‘confirm’ the high that price made two bars earlier as a true swing high.

Price breaks below the double bottoms and the low of Swing Low ‘A’ and that confirms the high three bars earlier as Swing High ‘B’.

It takes new lows to confirm Swing Highs and new highs to confirm Swing Lows. Trading these back and forth motions in the market is swing trading.

Once you learn to identify swing highs and swing lows, you can begin to anticipate what it will take to make the next price extreme a swing high or low and how to use that in your trading.

Swing High ‘B’ is confirmed when price breaks below the prior low that formed Swing Low ‘A’ and note that price is now making a series of lower lows and lower highs. Has price made a swing low yet? Remember, only a new swing high above a price extreme can confirm a swing low. There is nothing yet to even hint that price has made an extreme low.

After the sharp fall, price consolidates, forming an Energy Coil [an area of tight congestion]. Energy Coils is generally a sign that price is re-storing energy, taking a break after an extreme move. Note that they are often followed by a series of false break outs, so it can be dangerous to blindly buy or sell break outs from these areas. Did price just make a new swing low? Let’s take a closer look:

I view the Energy Coil and the engulfing bar before it as a price formation. Now that price has climbed back above both the Energy Coil and the engulfing bar before it, the double bottoms below the Energy Coil are confirmed as Swing Low ‘B’. This is a classic bottoming formation, by the way, and unless price quickly ‘zooms’ through this area to the down side, this area should provide very good support. Note that we cannot identify a new swing high yet.

Once price breaks below the double bottoms that formed Swing Low ‘B’, Swing High ‘C’ is confirmed. It is this back and forth actions that swing traders learn to anticipate and trade. The better you are able to anticipate the formation and confirmation of these swings, the better your swing trading will be.

Even though price briefly penetrated the bottoming formation of the Energy Coil, this area holds a great deal of support and price soon trades higher, above Swing High ‘C’ and that confirms Swing Low ‘C’.

Understanding the nature of swing highs and swing lows is not difficult once you take a few apart and see just how they are built and what it takes to confirm each new swing.

I wish you all good trading!

Tim Morge

2008-09-18T16:10:00.000-07:00

Swing Trading: Waiting for the Sweet Spot!

Waiting is one of the most difficult things for traders to do. Traders are generally high-energy individuals and the time spent between trades can often seem like unbearable agony. But it is important to remember that the market is always trending and when it is in a resting phase [congestion], waiting is usually the prudent thing to do. Positions initiated while the market is resting are generally "guesses" about the eventual breakout of a congestion area by a trader-and guesses are generally not very reliable. Rather than guess, I would rather wait for the market to show me which way it has decided to go before jumping in.

The chart below shows a typical congestion phase in the market. Price swings are showing both higher lows and lower highs-which means the range is narrowing as price restores its energy. Price will break out of this congestion area but at the moment, we can only guess whether price will break out to the up side or the down side.

If you look at the last bar on the chart, you can see that it is a wide range bar that breaks below the red down sloping Upper Median Line Parallel and closes well below it-with great separation! Does this bar give me the clue I need to choose a side?

It's an impressive looking bar at first glance but if you examine the chart carefully, you'll immediately see that although the bar has a wide range, it doesn't break below any of the prior swing lows. So it's simply a wide range bar still within the existing congestion. I need a clearer sign from price before I put my money on a trade.

Now price comes down and tests the blue up sloping Lower Median Line Parallel. Once price touches this lower line, it moves back higher and closes well off its lows with good separation. This last bar 'tested' the blue Lower Median Line Parallel but it didn't break below any swing lows.

Can I go long here, since price stopped at the blue up sloping line and closed well above it? Where would I put my stop loss order? I like to place my stop loss orders above or below price formations and there are no price formations to hide under. I still don't have enough information to place any money on a trade.

Now price trades a little higher, testing the red down sloping Upper Median Line Parallel it broke below several bars back. But there's nothing new about this area and price didn't' close above this line with any separation-and even if I wanted to go short there is no formation to hide my stop above. I'm still waiting.

Here's an interesting bar! Price breaks well above the red down sloping Upper Median Line Parallel but the rally fails miserably and price closes in the lower third of this wide range bar-which is a sign of weakness. But I'm not ready to take a position yet because price is still stuck right in the middle of the current congestion and it hasn't given me a single clear clue where its going when it breaks out.

This narrow range bar does nothing to shake my conviction that price is still congesting. Price has been above the red down sloping and below it, but price is really marking time. I'm waiting for a clear sign.

Price trades a little lower, testing the blue up sloping Lower Median Line again-so technically this is the 're-test' in a set up I trade consistently called a 'test and re-test'. But the re-test comes four bars after the original test and I prefer to trade on re-tests within three bars. I have found that the longer the re-test bar takes to occur, the less reliable the set up is. And just looking at the chart, price is still doing nothing more than working back and forth between the red down sloping line and the blue up sloping line. I'll continue to wait for a clear sign.

Nothing-new here! More narrow bars trading right at the narrowing intersection of the red down sloping line and the blue up sloping line. I have a fancy term for these areas where two lines with opposite slope meet: I call them Energy Points. And over time, I've found that they act like a magnet to price and attract it-and these interactions with Energy Points tend to be key turning points in markets. When price gets to this Energy Point or area where lines of opposing force meet, maybe it will finally give us a strong sign where it's going!

Just as price enters the Energy Point area, it breaks below the blue up sloping Lower Median Line Parallel. And it closes well below the blue up sloping line, in the lower third of the wide range, with great separation. Not only did price take out several prior swing lows, it left a nice set of triple tops just above the red down sloping line. I can hide my stop loss order above these triple tops! So now I have a clear sign from price of its probable direction and a quality formation I can hide my stops above. If price rallies back to re-test the red down sloping line-which would be right at the Energy Point-I'll get short and put my stop loss order three ticks above the triple tops price just left. NOW I am ready to put my own money on a trade.

Price rallies and tests the Energy Point, getting me short in the process. My initial stop loss on the short trade is three ticks above the triple tops and my initial profit target will be at the red down sloping Lower median line Parallel. If price gives me a chance, I'll hide my stops above formations as it works its way lower, boxing in profits.

Once price tested the Energy Point from below and failed to break back above it, you can see it was a one-way move lower. If I had spent my cash and emotional energy getting long and short and long short during the congestion, I would probably have been emotionally bankrupt and lost a tidy sum of money. And when price finally did give a clear sign of where it was going, I would have probably been so frustrated I'd have passed on the trade.

There is a time for patience. It's often the hardest lesson for traders to learn but waiting patiently and listening to what the market is telling you will improve your trading success and profitability greatly.

I wish you all good trading!

Timothy Morge

2008-07-28T01:31:00.000-07:00

Swing Highs and Swing Lows: Are We There Yet?

Many traders count themselves amongst the legions of “swing traders,” entering long or short positions as price approaches potential swing highs or swing lows. Other traders are intraday scalpers and use swing highs or swing lows as formations to hide stop loss orders above or below, taking advantage of the build up of entry orders from swing traders at these regional extremes. But the question to both groups of traders is always the same: Are we there yet? Have we reached the buying zone or selling zone?

By definition, swing traders are always trying to sell rallies in a down trend and buy dips in an up trend. Then they can try to ride the “swing” or swings higher, running trailing stops that “box” in their profits as price moves in their favor.

But the peril is always the same: Has a recent rally within an established down trend finally reached an area where a top will form and price will then return to the major down trend—OR—Has price violated the down trend and a new up trend had begun? As a swing trader, you always run the risk of being “hit by the train” of a change in trend. Is there a way to better gauge whether price is running out of energy and is about to turn OR is likely to continue, running right through its likely stopping area?

I’ve done a tremendous amount of charting and statistical analysis over the past five years developing tools to keep me from “stepping in front of the train” of newly emerging trends. And one of the most useful ways I have found is to analyze the qualities of the price bars as they approach these likely turning points. The quality I am looking for I have named “Separation” and hopefully these charts and this description will help you successfully identify turning points and keep you from stepping in front of the trains! Let’s look at a chart:

In this example, price has climbed higher and I added in a down sloping pitchfork, or Median Line, to show me the potential path of price IF I have identified a swing high. But note that this upper red line has not been “tested” by price. To relate this term “tested” to trend lines, trend lines are generally drawn by connecting two prior highs or two prior lows. If you choose a prior high and then randomly pick a point in space, rather than draw the trend line by connecting it to another prior high, you get a line in space that has a slope that may or may not have meaning—you won’t know until it is tested. An untested Median Line has a bit more validity because of the mathematical relationship of the three alternating pivots used to draw it, but it becomes much more valid once it has been tested.

To make the analogy easier to understand, let’s turn the down sloping line into a simple trend line. And we’ll state up front that this trend line is drawn from two prior high pivots. Now we have an area where we think price MAY stop at, but WILL IT stop at this trend line?

Let’s think about what would make it stop at the trend line: Price has topped out twice at this area. This leads traders to feel it’s likely to follow the same pattern. So there may indeed be good orders to sell at or above this trend line, because price has stopped here before. One famous trading motto is: “Beat on a line that is working until it beats you”. If there are a good deal of traders waiting to sell at or above this trend line, price will test it and price will fail to go higher—and probably run a good bit lower in a short period of time as traders try to get short as it becomes obvious that a top is forming.

Now what would make price run higher through this line? If most traders are already short this market, either from the prior test of this trend line or from other areas, they may have a great deal of stops being worked in the market just above this trend line. If this is the case, once price tests and begins to violate this trend line, price will accelerate through this trend line very quickly and move higher.

If price approaches the trend line but does not test or violate it at all, I still won’t know if a top is in, because I won’t know if there are sell orders or stop buy orders above the trend line. Because price hasn’t yet “peeked” beyond the doorway, I don’t what is beyond it.

Here you can see that once price ran up above the trend line formed by prior highs, there were lots of stop loss buyers and these orders pushed prices much higher—and price closed well above the trend line that I originally wanted to get short against. The distance above the trend line that price moved is our first look at “Separation”. In this case, price closed with good separation above the trend line, which shows good buying interest. There is NO sign of weakness on this chart and no reason to attempt to pick a swing top.

In this example, price tested the trend line, ran a bit higher when some buy stops were hit and then suddenly found nothing but eager sellers waiting to get short as the buy stop orders disappeared. Note that price went well above the trend line but closed well below the trend line, which is also great “Separation,” but in this case it is down side separation and is a major sign of weakness.

Having the upper separation, even though the lower separation gives me the sign of weakness I wanted to see before trying to enter a short position, is important because it tells me price gave the buyers all the chance in the world to take control of this market and they failed to take control. And once the sellers took control, they ran price back down through the trend line and quite a bit more—Again, a sign a major weakness.

In this case, price barely peeked above the trend line, giving me no up side separation. Although price then traded quite a bit lower, I am not as confident about the test of the trend line, because there may still be nothing but buy stops waiting above the trend line. And as price turned lower, new short positions were probably added. But these new short positions do not have much profit in them and any turn back up to re-test the trend line may run into not only the original stop loss buy orders that have accumulated there, but may also run into additional stop loss orders because of the fresh new short positions from this recent move down.

Here you can see price climbed well above the trend line and did find enough sellers to push price back down to just below the trend line. So there is good up side separation but poor down side separation. This means that even though we found solid sellers once all the buy stops were run above the trend line, we did not find enough aggressive sellers to push price a good amount below the trend line—which would have been a sign of weakness. In this case, I am afraid of the old saying: “What was resistance is now support.” The new short positions established at or above the trend line do not have much profit in them and any move back above the trend line is likely to again provoke a fresh round of stop loss buying, pushing prices to new highs.

Let’s look again at an example with good upper separation and good lower separation. When both are present, we know price gave the buyers every chance to take control of the situation. But once the market ran out of buyers, fresh sellers came into the market and took control, pushing price back down through trend line and forcing it much lower, leaving good down side separation. Having separation above and below the market tells me that the area has been “well scouted” and the close of the bar tells me whether buyers or sellers were in control. In this case, the area was “well scouted” and the sellers were clearly in control when the bar closed. This is a sign of major weakness.

Once we have good upper and lower separation and price closes on an extreme, how can we enter the market? In this case, price closed near its lows and gave me a major sign of weakness after leaving good upper and lower separation. IF price re-approaches the trend line, I will get short as it approaches that area and my stop loss orders will go above the high that marks the upper separation. I expect to find sellers above the trend line because they so convincingly took control the last time price was above the trend line. So I expect the sell orders will act as a buffer, or protection, and I purposely hide my stop loss order above this recently made price formation. These orders should effectively keep me from being run over “by the train”.

Now let me simply put the slope back into the trend line. Again, we see great up side separation and great down side separation. And price closed near its lows. The sign of weakness is obvious and if price comes back up to the down sloping line, I would initiate a short position and my stop loss order would go above the top of the recently made high—just above the upper separation. I expect fresh sellers will emerge to help buffer any rise above this trend line, which will help protect my short position.

Other traders often ask me how to identify swing highs or lows “as they occur” and if my analysis is correct, at the end of the day, I’ll be able to look back at this peek above the trend line as swing high. And so as it unfolds, I refer to these potential extreme bars as “Pseudo” swing highs or lows. As you get more practice watching price action unfold in “real time” and learn to think several steps ahead as price tests these areas, you’ll begin to see more “Pseudo Swings” in real-time and that’s when you’ll begin to catch swing highs and swing lows and still do a good job missing being hit by the run away trains!

Good trading to you all!
Thursday, June 28, 2007
Tim Morge

2008-07-12T04:18:00.000-07:00

Trading And Teaching: Parallel Lives

Traders on the internet, on my forums and at the various Traders Expos I speak at often ask why I teach seminars, write books and write articles and mentor traders. ‘Why would a professional trader with 36 years experience waste your time teaching—it just takes away from trading!’ is what I hear over and over.

The simple answer is that I find teaching is fulfilling. I find meeting other traders at the Traders Expos, whether they are just starting out or have been trading 40 years, is something that just makes me feel good. And I write because I like to write. I don’t do any of these activities to make money—I trade my own money and manage money for three large offshore funds and that’s my ‘profession’, but teaching and writing fills a need that trading doesn’t fill. Sometimes, when I least expect it, I learn something from those I am teaching to trade; and that’s a wonderful bonus. But teaching and writing is food for the soul to me.

And when I take a winning trade and then do a mentoring session a day or two later and watch a student going through their own trades with me one on one and they start diagramming out the same winning trade, it really makes me smile. I not only managed to make money on the trade, but I managed to teach someone else how to successfully read the market and use my techniques—and we BOTH made money on the same trade set up. That really is the ‘icing on the cake’.

Let me show you a recent example from the 30 Year U.S. Bond Futures:

Bond futures prices consolidate and then breaks higher, above the Swing High.

Bond futures were in a gentle up trend, making higher highs and high lows. Then they had a nice sell off before entering a trading range. Once price restored its energy by trading in the Energy Coil or congestion area, it broke to the up side and took out a Swing High. This was the first sign of strength since the sell off, so once price broke above the Swing High, I added in a blue up sloping Median Line and its Parallel Lines.

Bond prices climb steadily higher, easily breaking above the Median Line before pulling back.

Once price broke out of the Energy Coil or trading range, it traded straight up in an orderly fashion, easily breaking above the up sloping blue Median Line. But price had climbed about a full point without resting to restore its energy, so it was unable to hold above the up sloping Median Line. You can see that the last bar on the chart above zooms lower, through the up sloping Median Line, and closes on its lows with great down side separation—which is a sign of weakness.

When price breaks and closes below the up sloping Median Line, I added a red down sloping Median Line set.

When price zooms through the up sloping blue Median Line and closes on its low, I add a red down sloping Median Line and its Parallel Lines. You can see that price has already tested this new down sloping Upper Median Line Parallel, so I now have two sets of Median Lines on my chart—one up sloping and one down sloping—that have been tested. Though it sounds like it will only confuse the issue, instead it spawns areas where Lines of Opposing Force meet—and I call these areas Energy Points. My research has shown that these Energy Points can act as price attractors, giving me both a price target and in some sense, a good feel for the time it will take price to make it to any specific Energy Point; in other words, you know where price SHOULD go and how fast it SHOULD get there. Of course, price doesn’t always cooperate, but the probabilities once price starts heading for these areas is quite high, so they are quite useful.

Price leaves double bottoms but note that there is no price structure that will draw in natural buy orders where I can hide my stop orders.

You can see on the chart above that price did head down toward the area where the up sloping and down sloping Lines of Opposing Force met, but price drifted too far to the right [in time or space] to touch or interact with that Energy Point.

Instead, price tested the up sloping Lower Median Line Parallel and it closed nicely above it with great separation. This close is the first sign of strength since price broke back below the up sloping Median Line. But I could not consider simply buying Bond futures at this line, because there are no natural price structures [swing lows where other traders will have resting limit buy orders, for example] to hide my initial stop loss order below.

At the moment, I am left with a gorgeous chart. Price stopped where it was supposed to, leaving double bottoms, but there is no good trade entry set up.

Price tests the up sloping Median Line again and closes with good up side separation.

Four bars later, price tests the up sloping blue Lower Median Line again and it closes with good up side separation—which is again a sign of strength. Price is now making higher lows, so I can now use the prior test of the Lower Median Line Parallel as a Swing Low—because there should now be traders placing limit buy orders at that prior low—and I can hide my initial stop loss sell order below this Swing Low. Let me show you what I mean:

I want to buy a re-test of the up sloping Median Line. You can see my initial stop loss and profit targets diagrammed as well.

Now that I have a Swing Low to hide my initial stop loss below, I can use one of my favorite entry techniques: the ‘Test and Re-test’ entry. Price has just tested the up sloping Lower Median Line Parallel and if it comes back down to re-test it, I will be a limit buyer there, at 113 20/32. My initial stop loss will be three full ticks below the low of the first test of this up sloping Parallel Line, at 113 16/32. I’m risking four full ticks in the bonds, but what is a reasonable profit target?

I have two Median Line sets on this chart and at least for the moment, it’s not clear to me which one will act as resistance to price. Do I place my initial profit target at the down sloping red Upper Median Line Parallel or do I place it at the up sloping blue Median Line? Both targets offer me better than 2:1 risk reward ratios, so either would be acceptable. There isn’t a huge difference in price while I am diagramming out this trade, but remember that as price moves to the right, the difference between the two potential profit targets will get larger and larger. Is there a way for me to get a better feel for which line is more likely to work?

Note that I measure the undershoot from the down sloping Median Line and then transfer that same measurement above the down sloping Upper Median Line Parallel.

Note that I measured just how far price stopped above the down sloping red Median Line on its second test of the up sloping blue Lower Median Line Parallel—the area where I want to get long. Then I transferred that same distance above the red down sloping Upper Median Line Parallel. I added in red Sliding Parallels at both areas to make the measurement easy for you to see.

And now, right in front of me, is a new Energy Point that SHOULD act as a price attractor. It’s the area where two Lines of Opposing Force meet: The red down sloping Upper Sliding Parallel I just added in and the blue up sloping Median Line.

Are there any other clues?

Here are my limit buy orders, initial stop loss orders and profit orders mapped out for you.

Looking to the left, I notice that there is already a significant Swing High at the same area—and so I simply add in a horizontal blue line to mark the potential ‘Double Tops’ that might form IF price gets attracted to this area and runs out of energy.

You can see I have diagrammed my limit buy order, my initial stop loss order and now I have added my profit order at 114 06/32, at the Energy Point.

Now that I have settled on a profit target, I enter my limit buy order and my initial stop loss order. I can’t place a profit order until I have a position! Let’s see if the markets let me in:

Once price climbs higher with a large range bar, I move my initial stop to break even.

Price did come back to re-test the up sloping blue Lower Median Line Parallel, getting me long in the process. Once I check that my limit buy order has been filled at 113 20/32, I enter my limit sell order at the Energy Point at 114 06/32.

You can see that price spiked higher and at the close of the bar that got me long, I had a potential eight full ticks of profit in the bonds—and that’s too much money to let turn into a loser [$250 a contract]. I cancel my initial stop loss order at 113 16/32 and move it up to break even, at 113 20/32. I would move it higher, but there is no natural market structure to hide my stop below.

Price is dragged higher, right to the Energy Point at the Median Line and the prior Swing High. I exit my position at my limit sell profit order, taking a nice profit out of this Bond futures move.

You can see that price traded right to the Energy Point at 114 06/32, filling my profit order. Even though I use the areas where these Lines of Opposing Force meet in my trading day after day, I am still amazed when they act almost like an elevator, pulling price nearly vertical to an Energy Point. But I see Energy Points attract price in this fashion over and over again. Once you learn to identify them, they are wonderful sign posts in the markets to use when you trade, giving quality price and time projections.

I mentioned at the beginning of this article that ‘when I take a winning trade and then do a mentoring session a day or two later and watch a student going through their own trades with me one on one and they start diagramming out the same winning trade, it really makes me smile’. In this case, I had a mentoring session the very next day with a beginning trader that had had three prior one on one mentoring sessions with me and halfway through the session, he began to show me this same bond trade and my face broke into a broad grin. I didn’t interrupt him as he told me in great detail how he stalked the entry, how he carefully chose his initial stop loss area because there should be limit buy orders there that would act as protection for his stop loss order. To be honest, we chose different profit targets: he chose to put his profit order at the red down sloping Upper Median Line Parallel, partly because it was the more conservative of the two targets. And he did not ‘see’ the undershoot/overshoot that I used to draw in Sliding Parallels, so he didn’t have an Energy Coil on his charts where the two Lines of Opposing Force met.

But his entry was identical and his stop was picture perfect, hidden below the prior Swing Low to take advantage of the likely limit buy orders resting in that area. And although I squeezed a few more ticks out of the trade, I’ll bet he was more excited about his winning trade!

But I got the satisfaction of knowing that someone was now making money using the methods I taught him. And odd as it sounds, I probably got more satisfaction from him seeing and executing that winning trade than I got when I made the same winning trade the day before.

"Master your tools, Master Your Self." ®

I wish you all good trading.

Timothy Morge

2008-07-04T22:51:00.000-07:00

Currency Traders: The Fed Has No Clothes! Part 5

(Or, in other words: What’s Going To Happen With the US Dollar?)

Let me explain the state of the currency markets in the 1980’s: More than ninety-five percent of all cash currency transactions were made through banks. Brokerage firms did not offer cash FX prices, companies had to deal through banks and cash brokers only dealt with banks and a select few Investment Firms. The banks controlled the flow of all the cash currency transactions and other than outright position limits and cash FX trading was basically unregulated in the bank arena.

Today, only roughly fifty-five percent of the transactions in the cash FX market go through banks. The rest go through exchanges, FCMs that make markets in cash currencies to retail and institutional customers and through the electronic brokerage service, a brokerage clearinghouse that allows very large net-worth individuals, corporations, banks and investment firms to deal direct. These days, General Motors can sell dollars directly to a large private speculator through EBS. The days when the handful of large banks in the world controlled the cash FX markets and could really influence flows are gone. Banks no longer have the risk tolerance to carry the huge speculative positions we routinely carried in the 1980’s—they have credit risk and mortgage portfolio problems to worry about. Risk has shifted largely to the speculating crowd and the central banks don’t have control of that crowd. For better or worse, control of the cash FX market has shifted from the few to the masses and that has greatly diminished whatever power the central banks had, IF they ever had the power over the cash FX markets traders attribute to them in ‘the good old days’ of cash FX.

The dollar is currently in a very strong down trend. Until that long-term trend changes, the central banks know that buying US dollars against the major currencies is throwing money away. They do not have the reserves or the sheer power to turn these long-term trends in the cash FX market. And in the case of the United States, the Federal Reserve has so many other urgent matters it needs to address, the dollar’s level is not even on the list of policy items worth pondering.

Currency traders shouldn’t spend any time or emotion worrying about whether the central banks are going to stop the dollar’s slide. The truth is quite simple: when the flow of capital out of the United States ends, the slide of the dollar will stop. It’s well known amongst the larger market participants that the countries that had traditionally held the majority of their reserves in US dollars have been diversifying their reserves out of US dollars and into other currencies. China and Japan have sold a huge amount of US Treasury Instruments and then sold the US dollars they received from these sales—many insiders estimate that China now holds less than 1/3 the US assets it held three or four years ago.

With the emergence of several new large economies [Europe, China and India] that are beginning to rival the US in buying power, investors around the world realize that ‘flight to quality’ may not necessarily mean a move into US denominated assets. As little as six months ago, when I mentioned it might soon take three US dollars to buy one euro, people generally felt I was overreacting to a short-term down trend in the dollar. But these days, it’s become clear that the United States is not in the driver’s seat when it comes to determining the level of the dollar, the level of their own interest rates and the capital flows in and out of their own country. The markets will take the currencies where they take them and the central banks, like all other traders, can go with the flow or stand aside—anything else will result in losing positions that eventually will be liquidated.

I wish you all good trading!

By Timothy Morge

2008-07-02T03:35:00.000-07:00

Currency Traders: The Fed Has No Clothes! Part 4

(Or, in other words: What’s Going To Happen With the US Dollar?)

For the next three years, the central banks intervened aggressively in the currency markets, and they made it a habit to try to get the most ‘bang for their buck’ by confirming their intervention and usually leaking their intent to intervene before the markets even opened to a select few traders. And so it seemed to many traders that the central banks ‘called the shots’ and had complete control over this market. And when traders today talk about those three years and talk about the Fed and the other major central banks in general, they seem to feel they are fairly invincible when they want to take action. But nothing could be further from the truth.

Like all things in life, if you use a trick too often for too long a period of time, people get used to it and it begins to lose its effectiveness. The dollar had fallen so far, traders that tried to sell as soon as they heard the central banks were intervening usually found themselves short US dollars at poor levels, because they had jumped in and sold the break out to new lows. After several years of seeing the same announcements and watching the central banks pummel the markets, traders simply got smart: when the central banks intervened, they simply stepped out of the way.

Once the general market stopped jumping on the bandwagon when the central banks announced they were intervening, the traders the central bankers were using also quit initiating their own new short positions—instead, when the phone rang and they got the order to sell dollars, they’d simply execute the order and then go back to what they were doing. This indifference to the central bank sell orders quickly highlighted the truth: without a trend, the central banks were just market participants. The size of the cash FX market is so large, no one player or even five or six players—even five or six or seven central banks—can turn a major trend around in the cash FX market. The trends in the cash FX markets come from huge capital flows and only long-term changes in the policies that cause these flows eventually stop and turn the trend.

When traders these days think about that three year period, they believe the Fed and the other central banks changed the trend in the dollar and sent it reeling lower; time gave the central banks ‘super hero powers’ they never had in real life. The dollar had been falling for more than six months and had declined more than twenty-five percent from its highs before the central banks even started to plot the Plaza Accord in 1985.

When they finally acted, they jumped on a fast moving train: The dollar was already in a very strong down trend and they simply advertised their blessing of the existing trend. Here’s a chart that shows where the US dollar peaked and just how far it had fallen before they began to blatantly sell dollars:

More in part 5…

By Timothy Morge

2008-06-28T02:29:00.000-07:00

Currency Traders: The Fed Has No Clothes! Part 3

(Or, in other words: What’s Going To Happen With the US Dollar?)

I told him I honestly didn’t know what they were going to do, but my position should tell him where I thought the dollar was headed. We walked out back to the trading desk together and watched as the rest of the senior traders started to build short US dollar positions against their own currencies. I asked him if he was going to sell any dollars. He just laughed and told me he had been limit short since I started selling Monday and he had started selling more this morning after his mate in London called. He already had a nice sized short position.

Near the end of the trading day, we got a call from a friend that traded at a Swiss bank. His name was Bernie and when Bernie called and told us he was ‘on maneuvers for the Swiss Army,’ that was his way of saying that he was dealing because he had ‘inside information’. He didn’t tell us anything other than that he was ‘on maneuvers’ and then asked for a price. He sold US$ 5 million to us so we would know he was bearish on the US dollar against the German Marks. To all of us that had been around and seen Bernie operate right before ‘official’ announcements’ or surprise government actions and laughed at his rumors, only to see he generally took positions right before abnormally large moves occurred, Bernie’s call was the final confirmation: If Bernie was calling, something official was likely to be announced soon.

After the US stock market closed that afternoon, the rumors began to get specific: there was going to be a meeting of all the key central banks in New York this coming weekend and they were going to make a major announcement concerning the dollar. There was no official confirmation, but the rumors were now persistent and we saw a steady flow of selling by customers that usually had inside information.

There was very little for me to do at this point. I had been short dollars since Monday morning and had added at every opportunity. I was as short as I wanted to be and at a price that was well above where the cash market was currently trading in both the German Mark and the Japanese yen. And I had finished building the bank’s short US dollar position the day before; it, too, already had a tremendous profit in it. But if these rumors proved to be true, the current profits would be small change after the weekend.

Later that evening, there was official confirmation that the world’s largest central bankers would be meeting in New York and they expected to release a communiqué after the meeting’s conclusion concerning a new coordinated economic policy, particularly targeting the value of the US dollar.

Although the US dollar continued to slip against the major currencies the rest of the week, the official announcement that there was going to be a meeting in New York by the world’s central banks seemed to take some of the frenzy out of the markets. A sort of eerie calm settled over currency markets and the volume going through the markets on both Thursday and Friday was much less than the volume on Monday, Tuesday and Wednesday. On our currency desk, our traders all had their positions, and because their positions were at much better averages than the current rate, there was little stress or pressure on them; the traders had all settled in to wait for weekend’s announcement and its implications.

The details of the Plaza Accord came out over the weekend, with a spokesman from each of the G-5 countries presenting their own statement. The focus of the coordinated policies was indeed the value of the US dollar. Now we all waited for the Asian markets to open, to see what effects the statements would have on the currency markets and whether the central banks would match their words with actions.

The cash currency markets open with trading in New Zealand and Australia at roughly 3 pm Sunday afternoon in Chicago. The central banks of both of these countries openly sold US dollars aggressively against the major currencies on the open and announced that they were actively intervening to lower the value of the dollar—something that was unprecedented. Those traders that didn’t believe the rumors of an important central bank meeting and change in policy going into the past weekend were now believers and tried to jump on the bandwagon by aggressively selling US dollars against the major currencies.

When the Japanese markets opened, the Bank of Japan [‘BOJ’] aggressively sold US dollars against the yen and also sold dollars against the German Marks—and following the lead of the Australian and New Zealand central banks, the BOJ made press announcements with each fresh round of coordinated sales of US dollars. As the markets opened one by one, the rate of decline of the dollar accelerated, as more and more traders tried to chase the trend.

There were similar rounds of fresh selling throughout the night and announcements each time by the central banks involved. It was obvious they wanted the most ‘bang for their buck’ and they were intervening as noisily as possible, hoping to draw in more and more sellers of dollars. And of course, the dollar was in a literal free fall for days.

The handful of traders that got the visits from the Finance Ministers on Monday and Tuesday were unofficially told later that the strategy had been to identify four or five major traders and make certain they were interested in creating large short US dollar positions early in the week. They then hoped that at least some of these traders would clue in a few of their larger clients or contacts once they had built their own sizeable short US dollar positions. And of course, human nature being what it is, these contacts or clients would then tell others and the message would then rather quickly become disseminated. Looking back on that week, the central banks were alarmed early on because the traders they had chosen didn’t do much talking—it became clear early on they’d have to make a few phone calls and do a little leaking themselves, and so they called the second tier central bank traders and gave them just enough information to get them initiating new short US dollar positions. And it was this activity that ultimately started the rumors that continued to build all week long.

More in part 4…

By Timothy Morge

2008-06-22T22:03:00.001-07:00

Currency Traders: The Fed Has No Clothes! Part 2

(Or, in other words: What's Going To Happen With the US Dollar?)

I woke out of a sound sleep that evening when the phone rang. It was the Head of Trading at our Tokyo office. He had just had a visit from the bank of Japan's Finance Minister [The BOJ as we called them]. Their conversation sounded very much like the conversation I had had earlier in the day with the 'Buba' Finance Minister. I had been instructed not to pass on the details of that conversation to any traders or managers nor was I to speak about the bank's currency position, so I did not tell him about my earlier encounter or the bank's current long German Mark position. He updated me on current prices, then wished me well and I went back to sleep.

I managed to sleep the rest of the night without interruption and then headed back to the bank. When I arrived on the trading floor at 5 am, it was dark and quiet. I turned on a screen, checked prices and noted that both my own position and the bank's position had appreciated overnight and then began my pre-trading preparations.

Around 10 am, my secretary walked out onto the trading floor to find me, which was a rare occurrence. My wife knew that talking to me during the trading day was relatively useless, since getting me to concentrate on anything other than trading during the day was futile and my secretary did a great job of screening everyone but my wife. My secretary told me the president of the bank had a visitor and he would like me to meet him at his private dining area for lunch around 11:30.

The visitor turned out to be a Minister from the bank of Japan. He was 'passing through Chicago' and wanted to stop by and speak with his good friends. As lunch progressed, he asked me what I thought about the US dollar's recent fall from all time highs. I told him I had been very favorable to the dollar during the run up, but its turn down had been quite impressive and orderly and I felt it would likely continue for some time. He agreed and told me that the 'BOJ liked the yen' and then continued eating. At the end of lunch, we shook hands and he again told me the 'BOJ liked the yen'. I told him I agreed and lunch was quickly ended.

Several hours later, I got the same phone call as I had the day before. Before he even asked, I told him I was now also long a good amount of yen against the US dollar. I told him I had not taken profits on any of my German Mark position, but I had added to the bank's German Mark position earlier in the day when it briefly pulled back. The president asked for a P&L number and then told me the bank Risk Committee would also like to have a significant long yen position against the US dollar. I was also told that if at any time I wished to take profits on my current positions, I should simply transfer the position to the bank's position. I was reminded again not to speak with the other traders or managers about either the bank's or my own position in either currency; nor was I to speak to anyone about the two meetings I had been in and what had been said.

The US dollar continued to trade lower against the major currencies the rest of the day but there was little excitement in the market. My instincts told me something was going on in the background but there were little if any signs that whatever it was had started, except for the two visitors in the past two days delivering a similar sounding message. Once the trading day was done, I balanced my accounts and went home to make dinner. I slept through the night with no phone calls, which gave me much needed rest.

As I pulled into the bank parking lot at my normal time, I noticed there were a few more cars than normal in the lot for that early in the morning. And when I got to the trading floor, I noticed that there were quite a few pools of light scattered around the still-darkened trading floor and I could hear other traders already discussing the markets. I put my briefcase in my office and walked down to the trading desk. I stopped one of the senior traders and asked why he was in so early and he replied he had heard from a friend in London that something was up-something with the central banks-so he decided to come in early and see what the market was doing.

I walked around the trading desk and talked to a few other traders and managers and there was now a definite buzz in the market that something was up, but no one seemed to have a real idea what it might be, just that the central banks were involved. I continued to keep my information to myself but listened intently, wondering where and when the 'buzz' had started.

About 9:30 that morning, my Canadian dollar trader walked over and told me quietly that she had heard from her contact at the Bank of Canada that 'a lower US dollar' against the major currencies was favored by all the central banks. The statement wasn't anything new, I told her, but then she told me that her contact had called her 'out of the blue' and offered the opinion. It seemed strange but it wasn't much to go on, I told her.

By then, my short US dollar position against the German Mark and Japanese yen had grown to about US$ 10 billion and the total size of the position I was trading for myself and the bank's Risk Committee was approaching US$ 50 billion. I had a good amount of profit in both positions and it looked like things were just beginning to heat up.

Several minutes later, the head of our marketing desk called me over and told me he had just gotten off the phone with a good client of ours, a central banker from one of the South American countries that had good sources within the larger central banks. He called and sold a good amount of US dollars against both the German Mark and Japanese yen, then told my marketer that he was very bearish on the US dollar against the major currencies. We generally heard from this small central bank trader when real news was about to take place-he was the sort that had good information and loved to piggyback off it for profits, so I took his phone call as a real sign that something official was likely to happen, and probably sooner rather than later.

I walked into my office and called upstairs. Fifteen minutes later, we assembled all the senior currency traders in the trading floor conference room and vaguely described the rumors going round and the Risk Committee's opinion on the situation. We did not recount our visits from the Finance Ministry officials-because if something 'official' did end up happening and we leaked the information that would be the last time we got a visit prior to the event. We then told the senior currency traders that their position limits had been tripled until further notice as long as they were short US dollars against their currency.

As I walked out of the conference room, one of my best traders gently grabbed me by the elbow and held me back in the room until it emptied. Then he asked me if I could tell him what was going on. I told him that we'd just told him all there was to tell and he smiled and said, 'this must be a big one. The whole desk has been watching you sell dollars continually since Monday. You haven't bought back a single buck! Now the rumors are starting and I got a call this morning from one of my mates in London telling me there was going to be an announcement this afternoon by the central banks. The dollar's been falling for six months-what are they going to do?'

More in part 3.

By Timothy Morge

2008-06-21T09:23:00.000-07:00

Currency Traders: The Fed Has No Clothes! Part 1

(Or, in other words: What's Going To Happen With the US Dollar?)

I recently spoke at The New York Traders Expo and once again, one of the most frequently asked questions was: 'have we seen the bottom in the dollar and if not, won't the Fed step in soon and stop the decline of the dollar against the major currencies?'

Before I tell my answer, let me go back a little over twenty years and tell you how the idea that the central banks stop and start trends in the currency markets became a popular myth. In the mid-1980's, I was one of the four or five largest currency traders in the world. When the Fed wanted to intervene in the currency markets in the US time zone, they rang my desk and got instant execution. I regularly intervened for the Fed in both the cash FX markets and the currency futures markets. Intervention then was not a new idea or concept-it was a normal part of the markets. The institution I traded for regularly intervened for the Fed in the currency markets, the interest rate markets, the debt markets, the stock indices futures markets and even the foreign debt markets. The thinking at that time was that the Fed would generally help smooth market moves, because disruptions were viewed as a bad thing.

If you want to know what it's like being one of the four or five largest cash currency traders right in the middle of a world wide economic event, keep reading! If you want to know why the central banks are unable to put together meaningful coordinated intervention packages these days, as they did in the Plaza and Louvre Accords that rocked the currency world in the 1980's, read on!

In the summer of 1985, I was not only running the cash FX trading operation but I was also the Head of Execution for the Risk Committee for the bank's proprietary trading portfolio. I carried a satellite phone around with me any time I was not at the bank-they were very heavy and were housed in a bulky box, but the reception was always great. I also had one installed in my midnight blue Jaguar, even though the antenna had to be drilled through the trunk and stuck well above the convertible top. I was a slave to the bank's directive that I always be available.

I loved to fish back then; in fact, I still fish every chance I get. I particularly like to fish for trophy musky and walleye in the fall so in late September of 1985, I drove up to a large lake in northern Wisconsin on a fishing trip with my wife. We had time to check into the house we had rented for the two week vacation, get something to eat and we were just packing our fishing gear to go out and unwind after a seven hour drive when the satellite phone rang. My wife gave me a glare that would have melted a steel bar, but I picked the phone up-I had to! It was the President of the bank I worked for and he told me he needed me back at the bank first thing in the morning. I reminded him I had just gotten here and I had not taken a vacation that summer. And of course, I'd have to drive most of the night just to get home. He told me to forget all the excuses, get in the car and get back to the bank.

'Something has come up.'

I tried one last time: I told him I was on vacation with my wife-we'd only been married two years and hadn't taken a honeymoon-and she wasn't going to like riding back home all night on a Sunday night.

'Let her stay and fish', was his reply. 'I need you here in the morning.' Then he hung up.

I started to explain to my wife but she told me she had heard the conversation and she wasn't going to stay if I was heading back. We packed quickly, got in the car and spent most of the night getting back. I had enough time to take a long hot shower, dress, and then get back into the car and head to the bank.

I got to the bank around 5 am and parked in my spot underneath the bank, then took the elevator up to the trading floor. The trading floor was usually dark at this time of the morning and today was no exception: there were a few eerie halos of light here and there shining in the dark where a few managers sat and talked but the floor that normally housed over 350 noisy traders was nearly empty and you could hear a pin drop. If there was a crisis, it wasn't evident by the state of activity on the trading floor. I went into my office and dialed the bank president's office. He answered on the second ring and told me he was glad I had gotten back safely and that he'd be down to see me later in the morning. He didn't tell me what was up, nor did he give me any instructions.

I was a bit puzzled but I assumed he would not have told me to drive back from vacation in the middle of the night unless I was needed, so I assumed when he wanted me to know what was going on, he'd tell me. I sat down at my desk and began preparing for my trading day. The trading floor slowly began filling up over the next few hours and by 7 am, the floor was bright and noisy-it looked and sounded like the beginning of any normal trading day.

There were economic numbers out at 7:30 am and again at 8:30 am that morning and these brought out a little extra volatility but all in all the day had settled down to its normal rhythm by a little after 9 am. After my normal pre-market preparation, I began selling US dollars against the German mark, initiating a new position purely based on the technical analysis tools I use in my trading. I got up from my seat at the trading desk, handed my trading sheet to my assistant and told him I was going to my office to grab a diet coke and get a few minutes of quiet time. As I stood up and turned around, I caught eye contact with the president of the bank up in the 'news ticker' area. This was a raised platform area that oversaw the entire trading floor and held a huge screen that scrolled the latest news throughout the day and when we had visitors, it was a great place to take them to give them an overview of the large trading floor. He was standing with another gentleman and he motioned me over.

As I approached the pair, I recognized the second man as Hans Tietmeyer, Finance Minister for the Bundesbank or the 'Buba' as we called it back then. He was a close friend of the president of the bank, so he visited the bank whenever he was in Chicago. As I approached the pair, he smiled briefly and after greeting me warmly, he said he understood I had cut short a fishing trip to get back today to trade. I admitted I had driven all night to get back today to trade but so far, the trading seemed rather subdued. Although the US dollar had rallied to all time highs earlier in the year, it had already given back more than twenty percent of its recent gains over the spring and summer and there was no indication anything explosive was in the works.

Dr. Tietmeyer asked me if I had a view on the German Mark and I told him I was currently long Deutsche Marks. He nodded his head at the president of the bank and then said to me quietly, 'we are quite fond of the German Mark. I like your position.' I smiled and then we continued with some small talk about his trip and my shortened fishing trip. Then he reached out, shook my hand and said again, pointedly, 'we are quite fond of the German Mark. Be well.' Then he and the president of the bank left.

Several hours later, I got a call from upstairs, confirming that I was still long German Marks against the US dollar. Then I was told the bank was interested in adding onto this exposure for the Risk Committee and I had complete discretion regarding size and timing but that they wanted me to be aggressive, since they agreed with the German Finance Minister. I was told in no uncertain terms that I had the full use of the bank's risk limits if I wished. I was not to discuss the position with any of the other traders or managers but at the end of the day, I was to call and report the size and P&L of the position.

I ended up the day with a very healthy profit on my original position and I also bought a sizeable amount of German Marks against the US dollar for the bank's Risk Committee that were also profitable at the end of the day. I called upstairs, reported my position and profits and was told that I should continue to be aggressive with the bank's position until they told me their views had changed. It had been a very long day, so after balancing my positions, I headed home, ate a nice dinner and went to sleep.

More in part 2.

By Timothy Morge

Measured Moves: Simple, Powerful and Profitable Trading Tools (Part 5)

2008-06-04T22:02:00.000-07:00

Again, the high probability short entry method I would use to enter this market is beyond the scope of this article, but the simple and powerful measured move that gives us a near picture perfect exit area for locking in our profits is once again a simple extension of equal measured moves, combined with confluence-in this case the area where the down sloping red median line intersects with the up sloping third warning line. Those traders that were short knew to take their profits in that area of confluence [in this case, because the lines that intersect are lines of opposing force-one is an up sloping line and one is a down sloping line-and that makes this an energy point] and in fact, would use the same high probability entry method I teach to enter a long position with very tight money management stops just below the lows of the move.

Let's see if this area held and if another measured move would have helped identify a potential exit for a long position:

You can see that price indeed turned on a dime in the area of confluence [or at the energy point] and has climbed all the way back to re-test the original lower median line parallel, a move of well over $40 per barrel. As you can see on this chart, there is no area of confluence yet, so as price moved higher, I simply keep moving up my stop profit orders each time price leaves a new higher swing low. Although you cannot see it on this chart, price continued much higher and is currently testing the upper median line parallel at nearly $120 per barrel, and the simple money management technique I showed on the chart above of moving my profit stops below each new higher swing low as they unfold has kept me in this trade all the way up!

Simple measured moves, whether you were living in Phoenicia over 4000 years ago or a current active trader, are easy to use once you understand them and can help you produce tremendous profits, especially in strongly trending markets!

I wish you all good trading.

Measured Moves: Simple, Powerful and Profitable Trading Tools (Part 4)

2008-06-04T20:17:00.000-07:00

Let’s look at another set of charts:

Crude Oil prices are in a steady long-term up trend but have recently pulled back down to test and break below the up sloping lower median line parallel. Note that as price came back up, I connected the lows, adding a sliding parallel below the original lower median line parallel. I also added three lines above and below that are parallel and have the same distance as the distance between the median line and its upper and lower parallels; these are known as warning lines and they are used to find support and resistance for measured moves in run away markets. If this market takes off to the up side or the down side, I expect one of these warning lines will help me pinpoint where price is likely to stop. A new break below the sliding parallel will be an ominous signal that a new large move to the down side has begun.

Note that price finally broke to the down side and began a long and protracted slide of nearly $20 a barrel.

Item	Unit Price	Qty	Total
Trading with The Pitchfork (PDF File) Item # Pdf File	$69.95	1	$69.95

Subtotal:	$69.95
Total:	$69.95	USD

Pitchfork

2008-03-15T07:30:00.000-07:00

Hi All Forker.....
I'm make this blog to learn all about market as a newbie in forex trading.
I'm become excited to learn all about pitchfork because it look simple but powerful tool.

Keeping a trading journal will help me to stick with this tool median line.
The key in trading is:

1.Discipline
2.Money Management
3.Risk Reward Ratio
4.Master Your Tools
5.Master Yourself

NEVER AND NEVER JUMP FROM STRATEGY TO STRATEGY, KEEP LEARNING ONLY ONE AND MASTER IT.

Buy 'Trading With Median Lines' & have it shipped anywhere outside the United States via Global Express Mail with Insurance and Tracking Included:
Trading With Median Lines:	$159.99
Int. Shipping and Handling:	$ 30.00
Total:	$189.99

Table of Contents
1. Introduction	Page 1
2. Median Lines	Page 13
3. Schiff Median Lines	Page 25
4. Inside Median Lines	Page 33
5. Gap Median Lines	Page 45
6. Trade Examples: Using Median Lines	Page 51
7. Warning Lines	Page 105
8. Sliding Parallel Lines	Page 109
9. Lines of Force: Proving the 80 Percent Rule	Page 117
10. The Trend Test Barrier	Page 131
11. Using the 0-4 Pivot Count to Anticipate Market Moves	Page 137
12. Trade Examples: Combining the Count and Median Lines	Page 151