How I’ve been passing the time in December…

• ragheehorner
• December 17th, 2009

I’m not a big fan of trading in the month of December.  I usually like to relax, hit the driving range, and clean the mess I have made of my office the prior eleven months.  And usually I don’t feel like I’ve missed anything.  Still, I am a trader…and when I don’t a have a chart to analyze and a trade to set up…well, I feel like a dragonslayer without any dragons.

So I try to focus on the very, very short term.  Something I usually reserve for time when I think that there won’t be any longer term follow through on my charts.  Since I focus on the 15, 30, 60, 240 minute and daily charts most of the year, the five minute chart (a staple during the 90′s) gets left out.  It’s the kid that gets picked last for kickball.

When I feel there will be movement but I don’t want any “longer term” commitments I turn to my oft-neglected time frame.

Each time frame represents a slice of psychology.  If longer term time frames are the forest, the five and even 15 or 30 minute chart are the leaves on the tree.  Consider that five minute charts will offer more and shorter term looks at intraday psychology.  They will offer less risk – and less reward per trade.  They will also move through the market cycles more often and more quickly.  Everything is in place for active, short term set ups…as long as you are patience enough to wait.

For me, intraday trading was my bread and butter in the mid-1990′s until about 2002.  The market psychology was perfectly suited for this time frame.  And I find myself gravitating to the five minute in Summer and more so during the holidays.

I usually resume my “normal” active trading after the New Year and this means that will be on January 4th, 2010.

I wanted to share my five minute approach here with some trades from today.  My five minute approach is a trend following approach which is say that I basically swing trade the short term charts.  This means that in order to set up a trade, the five minute must be trending.  I determine this by the angle of my Wave.

Here’s a view of the $USDCAD.   Notice the “clock angle” is heading lower at four to six o’clock?  It’s a mark down cycle.

(By the way, if you are not already familiar with market trend phases, please Google “Dow Theory” as this is where I first learned about market cycles – it’s an eye opener!)

From this view it’s the angle of my Wave that I’m most interested in and also the prior last major moves (rallies and sell-offs).  The white line is the 200sma which is there mainly to show potential support and resistance.  Since the trend is heading lower, I can look for corrections to short.

I’ll need my Fibonacci-based moving averages to do this.  This is the curent chart, and my third entry on the current five minute downtrend.  The lines on the chart are the 13 period ema on the close, the 21 period ema on the close, the 34 period ema on the high, and the 55 period ema on the close.

The short is triggered on a bounce of the downtrend as prices correct into the 13 and 21 emas.  I call this shorting “between the greens”.

You can see this is my third short between the greens and it’s currently higher than the 21ema close.  The stop loss is the highest red line which if the lines are *ideal* should be the dark red of the 55ema.  In this case the 34ema high (light red) is the higher of the two.  Regardless, the first red line – whichever it may be — is the warning track and the highest would be my stop loss.  I add five pips to whatever price that line is at and that’s my stop loss order.  For anyone already familiar with the way I swing trade using the 34ema Wave, this should seem very familiar.  Just because I am “daytrading” doesn’t mean I throw away the rulebook!  By the way, I am watching the 1.0700 to 1.0705 level closely as it’s both a major psychological level and where my 34 high and 55 close emas are plotting.  Since the 34ema high is at 1.0703, my stop loss is 1.0708.

Let’s look another example from this morning.  This one is on the $GBPJPY.  And I might add, that this is the only way I trade this pair.

In this example, the market is in an uptrend.  So the moving averages have one major change.  So I still have the 13, 21, and 55 period emas but when the market is heading up, I use the 34 period ema on the low.

The market must be trending to set this entry up!  So notice that when the $GBPJPY was moving more sideways, I cannot set up the intraday swing entry.  The blue circle would have been an agreesive entry long (I didn’t take it) but for those of you who are more aggressive, hey, it’s there.

The way I see it, five minute chart offer so many more opportunities, why be too aggro.  The next two pullbacks triggered by buys “between the greens”.

By the way, you don’t have to wait for prices to correct more than the 13ema to trigger the entry.  Anywhere at or between the 13 and 21 emas will do.

So there you have it.  Now let me mention, the stop loss is the bottom red.  In this case it’s the 34ema low.  I actually prefer when the 55ema close is the lower (or higher) of the two but it’s not a deal breaker - just something I like to see in terms of organization.  As far as the exit, currently the 34ema low is at 145.21 so my stop loss order is 145.21 minus five pips which puts the order at 145.16.

Profit targets can be another discussion.  I use a mix of Fibonacci retracemennts or extensions (depending upon the nature of the last major move) and psychological levels.

I hope this give you a good, in-depth look at what I’ve been up to for the about the last three weeks.

Let me know if you have any questions!

– Raghee, http://www.twitter.com/ragheehorner

p.s. I wanted to share two quick updates since I originally posted this…

This is the current view on the five minute $USDCAD.

The prior short was stopped out as prices rallied through 1.0700.  Subsequently the five minute time frame transitioned into an uptrend BUT notice the moving averages!  There is no organization.

This is a sign that you want to steer clear of the set up until the trend has an chance to settle down

Ideally you want to to see the 13, 21, 34, then 55 from top to bottom in a mark up cycle. Here the 55 is coming in jsut below the 13!

Let this trend clarity its intentions and then reassess.

The cycles move quickly so there is no need to get too aggressive!

The $GBPJPY pulled back again after I originally posted the update and triggered a third swing buy.

The first, if you recall (in blue), was arguably too aggressive because it occuree so early in the trend.  And if you took the lesson from the $USDCAD chart above, you’ll also see it lacked the proper organization for a good entry.

The key to this style of daytrading is be patient enough to wait for the marl up or mark down cycle, wait for organization, and then wait for the pullback.

It’ll be worth all the waiting.

Tickers: GBPJPY, USDCAD

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