Now, you might be thinking this is well and good but what does it mean to me. How could I use this information to make some money. 

That’s a good point, so let’s discuss it. We know that the trend has now changed direction and we are now in a Bull Market. Knowing this, we would want to be long the market. Of course there are other things to consider before placing an order, but for now, I’m just going to be using Trendlines in this example. 

I would place an order for the next day to go long. The type of order I would use is a Market On Open order. This means that when the market opens the next day, my order is immediately sent to the floor to be filled at what ever the current price may be. Of course I want to use a stop loss order and place it at the same time. I always use a protective stop. The logical place to put a stop is just below the last support and just under the Trendline so that’s what I did. 

Let’s look at Chart #2 and see where I placed my order and my stops. Again, look at the formation at the last “Hit” on the Trendline. What is it?

So, I’m now long the market, one contract from where the market opened at 152.80. My risk is about $338 but what did I forget to do? Come on now, you should know this stuff by now. After all, all it takes is a little Common Sense (I just love this play on words!) 

Yep, your right, I forgot to set a profit target. A profit target is a price point that you want to either take a profit or add a contract. To find my profit target, I’m going to have to have a little “bigger picture”, so I’m going to reduce the size of the chart and take another look. 

By taking a look at the high to the low of this contract the picture changes somewhat. The next thing I would expect the price to do is a 50% retracement. By drawing a 50% retracement level on the chart, you can see that the price should go back up and make a 50% retracement. There is some big resistance just below the 50% level and the price has to break thorough that before if can make a 50% retracement. 

There are a few things that we could do if the price does hit the 50% level. One, we could get out and take profits, another is that we could add on a contract, yet another one is that we could stay in the trade and just keep tightening our stops till we get stopped out. 

There is no correct answer. For this particular lesson, I’m going to put a MIT order (Market If Touched) at the 50% level. What this means is that if the price does in fact hit the 50% level, then my new order becomes a market order and I should get out at, or near, that price. 

Let’s look at Chart #6 to see what happens. There was a big Gap up as you can see. The price opened the next day well above the 50% level. Since our order was a MIT or Market If Touched order, so as soon as the market opened, our order got filled right away.  We ended up with over $1,000 in profits in less than a week with no draw down and an initial risk of a little over $300. 

Take care,
David Duty, CTA