Setups & Exits

Posted on March 8th, 2010 by navstock

The basics to trading using the bands is looking for two events. A Turning Point which is when the chart is changing direction and a Follow On which is where we have a small pullback and then the trend resumes in whichever direction it was heading initially. Examples can be found listed under various headings to the right.

Turning Point Setup

Turning points for us is when we can see and measure a change in direction of an instrument in a given time frame.

Rule 1 General entry rule: Momentum must be at or near the extreme of 100 or 0. When the chart crosses the mid and closes on the other side of the mid, a trade can be entered when there is a break of the high or low of that bar (long or short). The closer the close is to the top of the crossing bar the greater the chance for a good trade. The bar of a longer time frame must be showing the same direction. ie if you want to go long on a daily make sure the weekly is also long. If you want to short a 10 min chart make sure the 1/2 hr chart is showing the same direction.

Rule 2 Drift (Be careful): If we are looking for a long trade we would hope to see up bars starting on the opposite side of the mid, then crossing the mid, closing on that crossed side and mving on upwards. Sometimes you get an apposing bar in this progression. Care must be taken as often these trades will drift. Opportunities can be had but it may take time. If there are a number (greater than 3) bars before you cross the mid then it is advisable to stay away from that trade. There is a high probability that it will drift or turn back.

Rule 3 Spikes (Be careful): A spike is when the chart starts from in the or near the outer channel and extends itself across the mid to the opposing outer channel. These bars invariably pull back to the mid or are just pull backs. A break of the high/low of ones of these bars should be viewed with caution. Step back one time frame and wait for the pull back before considering entering the trade.

Rule 4 Chopping the mid (Be careful): If you see a cross of the mid and the next bar does not make a new high/low only for it to cross the mid again then not make a new high/low it is most likely going sideways. Wait for a close in the outer channel and a break of that high/low. Sometimes it is better to go find another trade or go play golf!

Follow On Setup

Rule 1 entry: While in an established trend, the chart crosses the mid on a pullback and on the very next bar crosses back then you can take a trade at the break of the high/low of the return bar. You will notice momentum does not change direction. Make sure longer frame bar is the same direction.

Rule 2 Be careful: As a trend continues, the pullbacks will become more frequent as the trend runs out of steam. You will notice the pullbacks develop closer and closer together. If you encounter a losing trade based on a pullback there is high risk in attempting another one.

Exits

It is almost impossible to know how far a trade will go. Knowing that, planning exits and be tricky.

An exit is much harder than and entry because it depends on what your intentions are. Are you a long term or short term person. Are you a position trader or investor. Are you a day trader. Each one requires a different mind set and though all have the same objective of making money, each will use a different exit to get there. For example, if you are day trading index futures and you want to scalp 1 point from every trade using a 10 min chart then your exit is simple If you want to get 50 points off every trade on a 10 min chart then you will have a problem. Less than 20% of trends will achieve that result but you want to be on them when they occur. Generally speaking while a chart is outside the bands or in the outer channel you are quite safe. Once the chart moves in and starts looking at crossing the mid you should start to think of an exit. Of course some of these are pull backs and will continue on which is ok for the longer term investor but for a person using  a shorter time frame they should take their money off the table.

Rule 1 Understand your instrument: It is important to understand what you are trading. You are most likely not going to get a 1000% increase on a blue chip stock.

Rule 2 Targets: Have target in mind before you enter the trade or position. This maybe a price target, a % gain, a time target, a fixed amount or a chaser. Whatever it is you are using, make sure you know what it is before you enter.

Rule 3 Pulling the pin: If you enter a trade and you see it turn against you, cross the mid and start heading in the other direction you have two choices. You can ride out the trade (works well for long term investors) or you have to pull the pin. Riding out trades for traders can have very large draw downs and is ill advised.

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