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发表于 2013-1-12 20:15:50
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Chapter 12&13 of Techniques_of_Tape_Reading
C H A P T E R 1 2
Trading Setups
In this chapter, we discuss setups that we apply in our everyday trading. They will look familiar to an experienced trader although there is a certain spin on classic setups. For instance, the well known cup and handle formation is tweaked somewhat for intraday trading. Also, such a commonly known setup as the ascending (descending) triangle has a certain twist that we describe.
Most of our setups with the exception of capitulation and euphoria are trend continuation formations. Capitulation and euphoria are the only trend reversal setups in our arsenal. But, as you know from the previous discussion, there are many ways to trade the same setup. If a trade fails as a trend continuation, it could be faded for a trend reversal. This approach is in keeping with what we discuss about the role of setups. Although they do not predict the direction itself, they show the signs of direction, and if the signs tell us that upward movement has failed, then a short could be justified. Breaking of the stop level indicates failure. Breaking of the stop level before the setup is triggered invalidates the setup. This way we can define a stop level as a level for fading the setup. This is also known as trading of pattern failure and can be one’s trading style.
Also, as you know from early chapters, every setup can be played with a different degree of aggressiveness. So, as you see the description of the setup with a recommendation to buy on the breakout (regular entry), you can apply to this all the possibilities we discuss earlier: buying before confirmation or buying after the breakout and test of new support.
JUMPBASE–EXPLOSION (JBE) SETUP
The jumpbase–explosion setup can be described as consolidation near the high after initial upward movement. The idea of this setup is that an initial upward movement (the J phase) shows the direction of major inter est. Then a stock meets resistance and consolidates under this level (the B phase). If the stock is strong enough to stay close to the resistance level without sharp retracement, it means that the path of least resistance is still upward and that the stock is likely to continue in the same direction as soon as it digests the distribution. We prefer the range of the consolida tion to be narrow, usually not more than 25 cents. The first stage of the setup (Jump) should be not less than 1.5 times, but preferably 2 times, the size of the range (Base). With a range of 25 cents we get ideally 50 cents or more of the initial movement.
This setup has several variations. They differ by the formation within the consolidation range.
1. Flatline at the High. Entry should be taken as the fiatline makes a new high. The stop is placed under the nearest support, or, if the initial runup has no pullbacks to indicate where support is, the stop is defined by risk tolerance. (See Figure 12.1.)
2. Consolidation after a Shallow Pullback. Volume should decrease on the consolidation phase. The buy signal is a break of the upper limit of the range (U). The stop is placed under the lower limit of the range (L). (See Figure 12.2.)
3. Narrow Range Near the High. Volume should dry up on pullbacks and increase on upward pushes. Buy and stop triggers are similar to setup 2. (See Figure 12.3.)
4. Ascending Triangle. The ascending triangle is similar to setups 2 and 3, with a somewhat stronger indication of successful breakout. This setup is sim ilar to the classic ascending triangle, with the only distinction being that we want this formation to occur within the consolidation range. (See Figure 12.4.)
DROP BASE–IMPLOSION (DBI) SETUP
The drop base–implosion setup mirrors the JBE on the down side for a short play. Everything that was valid for the JBE setup is valid for the DBI as well. It has the same formations and the same rules for entry and stop placement. An ascend ing triangle is going to reverse to a descending one, of course. (See Figure 12.5.)
FIGURE12.1
Flatline at the high.
FIGURE12.2
Consolidation after a shallow pullback.
FIGURE12.3
Narrow range near thehigh.
FIGURE12.4
Ascending triangle.
FIGURE12.5
Drop base–implosion setup.
OPEN HIGH– AND OPEN LOW–BREAK SETUPS
Openhigh– and openlow–break setups are breaks of the range that are played similarly to JBE and DBI setups. The only difference is that these are setups for the beginning of the trading day, so they usually don’t have initial movement. The idea is to define the most likely direction of the price movement by the direction of the break of the opening range. For these setups we want the stock to move within the range, not more than 25 cents. These are setups for the first 15–20 minutes of the trading day.
If the stock breaks the high of the range, we go long with the stop at the low of the range. If the stock breaks the low of the range, we go short with a stop at the high of the range. Since the opening is often quite volatile, this setup is frequently used for scalps unless the market shows a strong trend. Scalpers look for a 1:1 or 2:1 ratio of reward to risk. Holders scale out into a 2:1 reward/risk ratio and look for a trend. (See Figures 12.6 and 12.7.)
CUPANDHANDLE SETUP
The cup and handle is also a breakout setup and is very common for longer time frames. It works best on a day’s high, although it can be applied in the middle of the daily range as well.
In Figure 12.8, points 1 and 3 are the cup edges at the day’s high. Point 2 is the cup bottom. The volume should dry up close to point 2 and pick up close to points 1 and 3. The cup should continue for a minimum of 30 minutes. But more than 30 minutes is desirable. In our experience, the optimal time for a cup forming is 1 hour or more.
Point 4 is the bottom of the handle, and volume should dry up here. The handle should not have retracement deeper than 50 percent of cup depth. The volume should pick up at point 5. The handle should continue no longer than 30 percent of the time of cup formation, 25 percent is desir able. The stop is placed below the handle bottom. The entry point can be taken aggressively or conservatively as described earlier.
CAPITULATION
Capitulation is a reversal setup. It’s that fast, sharp decline with vertical movement and volumepace pickup that are necessary components because they suggest panic. Capitulation is one of the riskiest setups. It requires fast reactions and welldeveloped scalping skills because it sometimes provides just a
FIGURE12.6 Openhigh–breaksetup.
FIGURE12.7 Openlow–breaksetup.
FIGURE12.8 Cupandhandlesetup.
FIGURE12.9 Capitulation.
small, quick bounce. It could be treated as a scalp or as a hold for the recovery, depending on market conditions. A stop is placed under the level that the stock has bounced from as discussed in previous chapters. Keep in mind that this setup is more conceptual than others. It doesn’t have an exact indication of how big the vertical drop should be to provide the best chances for a profitable entry. In practical examples cited in Part Three, you will see that this setup contains a much bigger “art” ele ment compared to others. (See Figure 12.9.)
We do not describe euphoria as a separate setup here. It’s an exact mirror of capitulation. The main reason for not including it in our list of setups is that we avoid shorting strong stocks altogether until we see clear reversal. Shorting strong stocks can be even more dangerous than buying capitulation. In Chapter 13 and in practical examples, we discuss the signs of trend reversal that we use for shorting the upward move exhaustion.
TRADER’S ACTION
Following is an algorithm of the action traders should take when a signal is generated:
1. Define the setup by comparing a stock chart to the charts of setups.
2. Evaluate the risk by volume and the look of Level 2. If you see low vol ume, a big spread, thin levels, small sizes shown by market participants, and/or a wide gap between levels, you know this is a highrisk stock. Skip the trade altogether or lower your share size. Be prepared to limit your expectations to scalp.
3. Define the trigger point and stop level as the setup suggests.
4. Evaluate the stop from the perspective of your risk tolerance. If the stop exceeds the size of the loss dictated by your risk management, lower your share size or skip the trade altogether.
5. Define the conditions that work in favor of the setup and the conditions that invalidate it.
If the stock breaks the stop level before triggering, then the setup is invalidated.
If the stock moves in sync with the Nasdaq100 (NDX), you need the NDX directional support for the setup to achieve a higher probability of working.
If the stock moves with no relation to the NDX, you need the NDX to be in favor or neutral to the direction of the setup. Do not take the trade if the NDX moves sharply against your setup direction.
6. Define the conditions of fading the setup. If the stock breaks the stop level before triggering and you get the NDX working against the setup, then fading is a reasonable trade.
7. Define your approach to the trade in terms of aggressiveness depend ing on market mood. Be aggressive in a trending market and conser vative in a choppy market. Pick your method of entry as the setups suggest.
8. As your entry is triggered, initiate the trade without hesitation.
9. Monitor your trade as it develops. Don’t let the movements within the range confuse or rattle you. Your trade is stopped out only when the stop is hit. The stop was placed there for a reason. Don’t change your mind in the middle of action—most likely it’s your emotions talking.
10. As the stock moves in your favor, wait for a clear exit signal to close the trade in full, or partial it out. According to tapereading principles, slow movement with steady volume indicates a stage where you con tinue to hold your position. Vertical spikes with sharp volume increases indicate an area and time interval to exit, either fully or par tially. Be willing to exit in full in a choppy market by taking the scalp. Ride your position in a trending market, protecting the profit by par tialling out and trailing the stop.
C H A P T E R 1 3
Trading Market Ranges and Miscellaneous Points
In this chapter we review some points and cases that “surround” our trading system, so to speak. By this we refer to situations that are not central to our system but that occur too often to be ignored. Also, we discuss those situations that present a particular danger.
As you have seen from the previous discussion, our trading system is trend oriented. However, the market is not always trending. Despite the fact that trends are relatively easy to find in the small time frames in which we trade, now and then we run into a ranging market. You need recipes for this market condition.
TRADING RANGES
There are three types of ranges we would like to discuss. Those are regular, narrow, and expanding. Each requires a different approach and presents a different challenge. We have to add that as for trend traders, a ranging market is very tough for us, and we tend to decrease our trading activity when we run into range days.
Regular Range
A regular range is wide enough to allow traders to profit from the movement within the range. Unlike a trending environment, this range requires that traders buy low and sell high. The major challenge is to tell the range from the trend early enough. If traders fail to identify the ranging market, they are destined to lose on false breakout attempts. Usually, if we see the market test the low and high twice and hold, we go into range trading mode.
When you are trading the range, you need to buy at the first sign of strength as the market bounces from the low, or short at the first sign of weakness as the high is holding. Stop placement is self explanatory, just outside of range bounds (see Figure 13.1). The exit point in this case is just below the upper limit of the range.
If you see the volume rising on upward movement and decreasing in the downward stage, you might want to try to let your profits run. In order to give your profits room if the market breaks the range, you can scale out of your position by selling half your shares at this point. A trailing stop for another half should be placed just below midrange. In Figure 13.2, a stop would be placed at $19.40–$19.45.
The idea behind this is based on the assumption that if a stock is going to break out of the range, it should bounce off $19.50 in most cases. If it’s going under the midrange, then most likely the stock will remain rangebound. If a stock is breaking out of the range, then your new stop level should be $19.80–$19.90, just under new support, which forms at $20—former resistance, as discussed in Chapter 12. In this scenario a new set of rules comes into play. Now it would be a trend trade, and the exit should be made as discussed in Chapter 12.
F I G U R E 1 3 . 1
Regular range.
Narrow Range
Trading in a narrow range market is very difficult. Unless you are just scalping small movements, all you can do is to wait for the breakout of the range. The time in which a market is locked in narrow limits can and should be used for preparing for the break, which means identifying candidates you will consider trading when the break finally occurs.
The problem with a narrow range is that you can’t trade within it because as soon as the stock (index) bounces from the low, it’s already almost near the high limit of the range, and you have no room for a profitable entry and exit. Attempting to buy at the bottom of the range or short the top is too risky since you have no clear indication that range is not getting broken, and, even if your entry is correct, the reward is too small and doesn’t justify the risk.
So, the only thing we are left with is the attempt to play the break out of the range. In order to place odds in our favor, we need to select the stock that will break with high enough probability, or, at least, one that won’t go all the way back to the opposite end of the range if the break fails.
F I G U R E 1 3 . 2
Trading within the range.
We need to play the stock that is stronger than the broad market for a long trade or weaker than the market for a short trade. The idea of this search is quite simple, yet many traders make many losing trades during narrow market conditions because they try to bet on a break without properly selecting the candidates.
For a long trade, the stock needs to hang near the high while the market pulls back to the lower limit of the range. If we get such a stock, then we have a very good chance for it to break its upper limit as the market merely bounces from its lower limit. This situation is shown in Figure 13.3, in which the stock chart is combined with the NDX chart.
As our long candidate breaks the upper limit, we enter it long, making sure that the market is holding the lower limit of the range and bouncing off it. Now, if the market goes to the upper limit of its range, our stock is likely to go with it and often may be even stronger because it’s being identified by many traders as a strong one worth trading in an unsure market. If the bounce fails and the market breaks down, our risk on this stock is minimal, because its relative strength won’t allow it in most cases to go down as fast as the broader market, and our stop will be as usual. If we were to buy the stock that goes up and down in the range with the market, we would practically bet on market direction. In the first case we use the market as an indicator. This is a major difference. The first case is gambling; the second is going with the odds using the relative strength of a particular stock as an indication of its being a likely candidate.
Also keep in mind that this approach is useful as a backup plan in trending markets. As the market is going up, you are playing breakouts and effectively are going with trend. But you need to have a couple of candidates on the back burner for short play in case the market reverses. Instead of guessing which strong stocks will reverse with the broader market, you are shorting those that were weak before and didn’t break down because of the overall market strength. As soon as the market weakens, this support disappears and the breakdown comes. A similar approach can be used for finding candidates for a long play during a downtrending market, where you would buy the breakout on market reversal from the lows.
F I G U R E 1 3 . 3
Trading a breakout from a narrow range.
Expanding Range
The expanding range is the worst market we’ve ever encountered. It is always costing us stop after stop. This is the market that makes new highs, just above the upper limit of the range, then drops all the way back to the low, breaks it, and, instead of continuing to the downside, it bounces all the way back up, repeating the cycle. See Figure 13.4 for an example.
F I G U R E 1 3 . 4
Expanding range.
A widening range with no continuation on any side makes it very hard to read the movement. Here is what happens when a trader tries to play this kind of market. As level A is getting broken, trend traders go short. Instead of a continuation, the market bounces, stopping them out. At the same time, the breakdown doesn’t allow going long for a range trade. As level B is touched, traders don’t go short because of the break out, but attempting to go long won’t work either. A spike over the break out level is too small to allow any room for profit, and the market drops back effectively, stopping the traders out. This vicious cycle repeats at levels C, E, and D. This kind of action is very hard to recognize in time. In theory, you can reverse your position as the market bounces and breaks your stop level. In reality, this is much easier said than done. You can’t recognize this kind of action on a first or second failed break, and you don’t know which of the failures is going to be the last one.
MISCELLANEOUS POINTS
We would now like to go over some miscellaneous points—those fine distinctions that allow us to correct our action, those factors that should be taken into consideration in a particular situation. These points serve as a means of finessing our system and allow us to adapt. When your system tells you, “If you see A, then do B,” these fine distinctions tell you, “Unless you see C.” With experience traders can collect plenty of these points that help them hone their systems, and make them more adjustable, more fiexible, and more “personal.”
In setups with consolidation, the time factor is important. Too short a consolidation usually leads to a fast, shortlived vertical spike which often signals reversal. At the same time, too long a consolidation has a greater chance to fail. It’s hard to define the optimal time of consolidation, since it is different for active and dull markets. A careful observer can develop an intuitive feeling of “too short” and “too long.”
When a stock makes several consecutive consolidations and breakouts, each next step of the ladder should be shorter than the previous one. Ideally the length of each next step is between 50 percent and 75 per cent of the length of the previous step. If this ratio is less than 50 per cent, the trend is accelerating and is likely to approach its end. If it’s bigger than 75 percent, the breakout is more likely to fail.
As a rule we consider the second attempt of a break (test of resistance or support) to be more likely to fail, and the third attempt to be more likely to succeed.
In a double top scenario we look to enter a short position when the price drops below the bottom located between two tops. The stop is placed above the top. We do not short the second top itself. In a double bottom scenario we look to enter a long position when the price rises above the top located between two lows. The stop is placed below the low. We do not buy the second bottom itself.
When a stock goes through consolidation and you intend to play the break of the consolidation range, avoid entry of the trigger if a stock spikes sharply right into the trigger level. This scenario tends to produce traps rather than valid breakouts. The ideal case is to go slowly approaching the trigger level and orderly break.
When you select your candidate for a breakout by the narrow range method discussed earlier in this chapter, make sure it’s not a stock that by its nature moves in the opposite direction of the market. Sometimes certain sectors act like this; gold stock in the fall of 2002 is an example. If you fail to take this into consideration, you would most likely buy for such a stock breakout when the market is bouncing, although this is the time for this stock to retreat.
When you are looking for an uptrend reversal after a strong move, you want to see a stock losing the latest support it has formed on its way up. Avoid shorting euphoria itself since it can easily turn out to be a shallow pullback or new consolidation. Rather you want to see a stock pulling back to the support level, bouncing on the decreasing volume without making a new high, retreating back to the support, and breaking it. This break is a trigger for a short entry.
A similar approach can be used for the reversal of a downtrend. When you are trading a stock that follows NDX movements, superimpose its chart onto that of the NDX to find out how much in sync they are. The best trading candidates are those that move with a slight lag because this allows using the NDX as the leading indicator.
The process of finding the leading indicator can consist of two steps, including the sector index. It makes the selection of trading candidates and timing of entries and exits more fine tuned, although somewhat more cumbersome. Some of the most popular are the Semiconductor index (SOX) and the Biotechnology index (BTK). |
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发表于 2013-1-11 21:41:31
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你看的书很多.............知道的方法也很多.............看书是对经验的总结但还是要靠自己去总结的，每个市场不一样，方法核心虽然是一样，但是用起来就不一样。。需要经常数理的测试与优化配合自己的方法才能发挥最大的效果...............