Thursday, 2 February 2012

Anatomy of a trade- dissected and laid bare ( short Corn H12 CFD)

OK, I have put together this presentation to show not only the power of the reaction line but my overall entry /thought processes etc. There's a lot to show you so I am going to try to keep my words as brief as possible.
Corn is a market i follow closely and is the largest grain traded in terms of world volume. It has complex fundamentals but for the purpose of this trade I am looking only at the technical perspective. Here is a daily continious chart ( Esignal) of Corn ECBOT. The near month is March
The lines on that charts are either REACTION LINES ( red) or historical long term pitchforks/Median lines ( coloured pink, blue etc). Recent price behaviour since tha Autumn is sideways within a range of 575 to 675. I have no view to call the long term future direction but suspect it will be up.

Here is a 60 min chart showing the recent gap down ( limit down) on the back of fundamentals USDA report. We have found support at just under 600 and rallied to close the gap. It was my view that we may turn here and make another wave down. So as price approached the phycological 650-00 area and the reaction line bang on/at that price, i waited to see the opening yesterday.

Now we drop down to a lower TF and the Metatrader CFD for March 12 below. I never leave resting orders ahead of the grain opening which can whipsaw so I was waiting to see if price would open up above 650 or break up above 650 in the opening 15 mins.Remeber we have rallied nearly 50C and as yet have had no retracement. For sure I had my reaction line at this level plus price was getting fatigued after a near 50c rally plus there are a band of long term RL's from the daily chart that have worked superbly on price. I anticipated that price would at least retrace .25 to.382 even if it was going to break up out of this range( which is a possibility) or it would return down to restest 600 again,but we would see some reaction before price broke above this important level at 650. Either way i was looking for a minimum 10 cent fall and was prepared to risk just under 1 3/4C. I trade CFD's on corn as I can use fractional MM and always commit a propotion of any trade as a 'keeper' to try to catch more than an intraday move. Usually i take 30-40% profit when my short term objective is reached.Please remember the spread is a whopping whole 1 cent on the CFD PLUS there is a 15$ RT commision. For this reason i never trade the CFD unless there is a good R:R ratio. Here below is the opening. You can see the thin red horizontal RL just below the thin blue ML. I went short .5 lot at 648.50 and 5 mins later another 1 lot at 647.25. Stops at 649.00 and 648.50 respectively.

After 15 mins price had fallen away but jumped off the lower red reaction line at 644.30. but had resistance above from the reaction line just above at 645.50 I watched with baited breath to see if we would hold and rally up towards my stop.

Price shows me that it has not YET got the strength to go higher as it failed to break above the RL but this is only a 4C move down so anything could happen.
Price now breaks under the lower RL at 644.30 and I know we are approaching support at
the RL seen rising from the bottom left hand side to the mid upper right hand side of the chart. Its time to add a fork to see where the objective/support/resistance is.

Here below we see price hit the RL. I have added an unorthadox GPF fork which uses the 'before' and 'after' pivots and always shows you the relationship between current price and more importantly the current reaction lines.

Next I add the custom indicator to the pink fork and hey presto it automatically draws the reaction lines ( it changes colour to teal green). You can see the RL from this fork bisects the middle of the fork and also the next RL shows up at 648.00 at the top of the screen near the entry. This adds yet another RL at the 650 area which is really what i search for..grouping of reaction lines at a certain level and angle which show organic resistance/support and have a higher probabitlity of affecting price.. the more RL's above the rising market the higher the probability that price will struggle at that level.

Now we wait to see if the diagnonal RL will suppress or support price...heres the 1 min chart below at which time we have taken partial profits at the green LMLP at 640.00 and moved stop to B/e on the remaining 1 lot.

Now a quick word on this type of fork. Have a look below. It uses the first high ( before any retracement) and the last low. It always works- try it yourself. Now i add a sideways fork( black) to see the first objective( below)

Price bounces off the LMLP ofthe green fork ( above) and is still short of the black horizontal CL at 638.00. If price goes above the two down sloping reaction lines then the outloook would be uncertain for the trade but we have taken equity out and are in for the long haul.

Hey presto! we have a pin prick touch on the what?..

We are through the green LMLP but bounce! ( as you would expect)

what will happen next?

here we see price has rallied back upto 644-25 and then fallen again to the confluence of the green LMLP and the reaction line. Think about what the candle in a higher time frame would look like?A classic dead bounce.

As price plays out it's merry dance you can see how i trust the RL's and what price does at them indicates its intentions.

So here below we are the following morning and we are still short and price is at 635.75

There were infact two other reaction line templates in use at the same time in multiple TF's plus the 2x and Bline indicators but i have specifically followed through on one chart from begining to end.
What will happen today Thursday 2nd February? Any rally above 642 to 644 would indicate to me we are going back up to restest 650 but i will close this position before the ECBOTclose later this lunchtime and make sure I am flat ahead of the 4.30 PM euro opening ( CET).

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