How to Enter and Manage a Trade Setup

 | Jan 25, 2013 | 9:00 AM EST
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For those of you who may be new to my work, I've already done an article that provides some handy guidelines that you can print out from here A Handy Guide to My Technical Analysis.

What I want to do today is walk through the process of the formula to make money with my work. The formula is Setup + Trigger = Entry and then MANAGE the trade.

The example I'm going to go over is the recent trade setup we had in ConocoPhillips (COP). This was a relatively simple buy setup that included a symmetry (100%) projection of a prior decline, along with a 0.618 retracement of the prior swing which was the Dec. 31 low to the Jan. 4 high.

Now the actual low was made on Jan. 11 at 58.03. This is what I considered a test of the zone, it was close enough for government work -- (within 2 cents of the zone). Once price continued to hold above this area, it was time to go to a lower time frame chart to look for a buy trigger. A TRIGGER is essentially telling you that it is WORTH placing a bet against a key support decision. I like to use a 30-minute chart for a trigger for a swing trade. Let's take a look at that next.

For a buy trigger in COP I wanted to see two things.

First I needed to see a prior swing high taken out on the 30-minute chart indicating a reversal to the upside. It would indicate a reversal since we would be shifting from the negative pattern of lower lows and lower highs on the 30-minute chart INTO the price support decision, to a new pattern of higher highs and higher lows.

Second I wanted to see a moving average crossover to the upside. I use the 8/34 ema crossover on all my intraday charts for this. It does not matter which happens first, it just matters that both conditions are met. On the 30-minute chart I have illustrated the prior swing high that was taken out along with where we first saw the 8 ema cross above the 34 ema. For example, let's say you entered around the 58.45 area. At this point, your initial stop on the trade can be placed either below the low made prior to the buy trigger which was 58.03, OR just below the low end of the price cluster zone which came in at 57.91.

Now we knew that target one for this setup was the 1.272 extension that came in at 60.41. This target was met in Thursday's session. Target 2 is always the 1.618 extension of the same swing into the setup zone and that comes in at 61.06. Target 3 is always the 2.618 extension of that same swing. This comes in at 62.93. We did make the first target in this case, though we don't always make the targets. For this reason, if a trade setup starts to move in our favor, I suggest that you use a trailing stop to manage the trade. Some of you may choose to take some profits at Target 1. This is fine, but try to keep some of your position with a trailing stop just in case COP wants to take you to Target Two or Three!

There are 3 different ways I would trail a stop. I will either use symmetry projections on a lower time frame chart, or place one below a prior swing low on the same lower time frame chart, OR you can use a moving average crossover the other way. I won't use a crossover for a stop however until the market has gone in my favor for a while. Otherwise after an initial entry you can get "scared" out of the trade if you don't initially give it some breathing room.

At this point, since we have met Target 1, I would either trail a stop to just under the 60.13 swing low, or if you want to give it more room, to just below the 59.87 to 60.04 area which is both below two key symmetry projections and a 0.618 retracement back to the recent low.  

I hope this description of one of my trade setups help. This is the method to my madness.

On Thursday on Twitter I posted an example of a sell setup in (CRM) that got stopped out Thursday morning. When a zone does NOT hold, you need to take the loss and get out of the trade!! Fibonacci defines your risk!!

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