Track 'n Trade Futures End of Day
Example 6: Short 123
In this Track 'n Trade 5.0 Futures Trading Training video, I want to start by demonstrating for you a simple 123 trading strategy.
Now, 123 trading strategy means that we have a reoccurring price pattern, within the software. Where we have a number 1 high point, or a number 1 low point.
Now, in this example- we're going to go off of this number 1, 2, 3 top point. A number 1 top point, is generally the annual high of any given market. So, here's an annual high. Once we get to an annual high, we start looking for the market to retrace back down to about....50% of the last major move, is pretty common.
So, if I take 50% tool, so you can see that this market has gone up, retrace back down, retrace back up. Now, we're anticipating it dropping back down, to the 50% level- to at least the 50% level. That's our, kind of our initial target.
A 123 formation, the definition, first, of an uptrend is: Higher highs, and higher lows.
Definition of a downtrend is: Lower highs and lower lows.
Therefore a 123 formation, is the top formation of where a trend changes from highs to lows.
We use our 123 Tool, up here, to identify and help us....trade this formation.
What we do, is we come in and we click and we drag down, from the top of the trend, which is the annual high. Down to the first retracement point. We click again, which identifies that retracement point, then we bring the mouse up to the highest retracement point back. This generally comes back to around the 50% here, as well. You can see, this is the marker where we've indicated the 50% level of this first drop.
Now, notice that we also indicate 45.6. That's exactly how far back this market did come. If it came any further, we would continue to move it back further and further, and further.
You can see that if the market came all the way back here, it would be 83% retracement back off of that 1, 2 point.
Right now, we're currently sitting right here, with the furthest back retracement back at 45.6%. If the market begins to drop, once again, we then will look for the market to come down, surpass the 50% level and go to the 100% level drop. That's our projection level.
So, the way we can trade this, is we can trade this in several ways. First of all, we can identify the fact that this is an uptrend, right here. We can wait for the market to break pass that lower trend line. Then, we can get into the market on a short position, on a break below the trend-line. Or traditionally, what often times happens, traditional technical analysts, will wait for the market to break below the number 2 point. If they wait for it to break below the number 2 point, we've confirmed with our rule, that a market is now in a downtrend. Because currently, it is in an uptrend- Higher highs and lower lows. We currently have higher high and higher lows. We don't have a confirmation that the market is broken lower, to give us multiple lower lows. So, we have lower highs, but we don't have two lower lows. Once we have two lower lows, we can confirm that the market has changed from Bullish to Bearish.
So, often times traders will wait for the market to break below the number 2 point, to enter the market and continue down, off the..break below the number 2 point.
It's your choice. You, as the trader, can make the decision, on whether you want to try and get in a little bit earlier, up here on a break trend-line. Or if you want to wait for the market to break below the 50% level.
There are advantages and disadvantages to both. The advantages, of course, of getting on a break below this trend-line, right here, is that your Stop Loss Order, is generally set behind the number 3 point. So, if you get in on a break below this initial...trend-line, your Stop Loss is behind the number 3 point, and your Stop and your risk is very small.
So, if we come in here, and let's say that we take our Risk Reward Calculator and we put it above the 45% level, or above the 3 point. Then, we say that we get in below this trend-line. You can see that on the bottom side, that we are risking about $635.00 for a profit potential.... If we bring that down to about $2,855.00. If the market makes a complete retracement back to the 100% level. So, that's the risk of 635.00 for profit $2,855.00.
Now, if we wait and we don't get in until the drop below the number 2 point, you can see that we could bring this down and if we got in on a drop below the number 2 point, then we put our Stop Loss behind the number 3 point, we would be risking $1,655.00, for $1,835.00 profit potential. Is that worth the risk? That's up to you! I personally think that's quite a big risk. Risking $1,600.00 for a profit of $1,800.00. Not quite the ratios that I'm looking for.
So, getting in on a break above, or below this trend-line, gives us a smaller risk, with a larger profit potential.
Again, there's always a trade-off. By taking a smaller risk, you also risk the market swinging down, coming back up and stopping you out. More likely of doing that, than it would if it were down here at this level. Doesn't give the market quite the room to grow, and move, that sometimes it needs.
So, in Track 'n Trade, the great thing about Track 'n Trade is that we can do multiple scenarios. We can try it both ways and see which way would've worked best for us.
Now, I'm going to come in here, and place an order. We click on the BS Button, which stands for Buy/Sell. I 'm going to click on the mouse, on the screen, and I'm going to place my order. You can see that I can line this order up, right here, with areas of support and resistance. I'm going to bring it right down below the trend-line. You can see my little triangle is pointing right below the trend-line. Release the mouse button, it says I'm going to place an order at 62.13, and I'm going to Sell 1. So, I'm going to go short on this market. I'm going to Sell 1, on a Stop. I'm going to hit Okay. Now, if that market breaks lower, I have to make sure that's right where I want it. So, now if that market breaks lower, I'm going to get into the market on a short position. So, let's step the market forward one day at a time. You can see we were filled. The market did break below our trend-line. Also, it filled our order. Now, it's coming up and saying I need a Margin Call, but that's simply because I forgot to open my account.
Since we are in a Time-Machine, let's come back and go make a deposit. I'm going to come back to August 1st, let's say that I put in $5,000.00 into my account. I hit Okay.
Now, I need to place my Stop Order. Now, I'm going to place my Stop Loss Order above the market, behind this number 3 point. Just behind it. Then, I'm going to Buy 1 back, if I'm wrong on a Stop. Then, I'm going to hit Okay.
So, now if this market drops in my favor, steps forward, now notice it's dropping; continuing in my favor. We can come over to this little dollar sign on the Control Panel. It then tells us our profits and losses.Currently, I'm up $642.50, in this position. The market did drop in my favor. My Stop is held above the number 3 point.
I'm going to step the market forward, once again. Then, it came back against me, so I'm down $367.00 today. Step the market forward again, and the market dropped nicely, in my favor. I'm up $817.00, today.
Now, my target point is 100%, down here. Now, I don't always like to make it run all the way to 100%. Sometimes, I like to take some profits at the 90% level.
So, let's come in here, and let's change our tool, so it indicates for us, where that 90% level is, rather than 100 on the 340.00 projection, I'm going to put in here 90.00. Now, we've got 90%. Now, there's a way we can take profits at 90%. We can come in here and we can put another order in here, at 90%. We can say...I'm going to Buy 1 back on a Limit. A Limit Order is kind of like a target order. You say, 'Well, Lan, if you do that, aren't you limiting your profits?' Yes, we are. We're limiting our profits, in doing it this way. So, we step the market forward, one more time, one more time. We can also move our Stop closer, too, up here. We don't have to leave it clear back there behind the number 3 point. If we feel like the market might retrace and come back against us, we can click and drag our Stop to a new location.
Actually, in essence locking in some profits, the distant between where we would get out if the market came back against us. Which would be this Buy area, right here. Also, the Sell area where we got into the market. So, that would be our profit potential, at this point. Where we would take profits if the market actually did turn around and come against us. Which in this case, we would be around $790.00.
If the market continues to drop, we're going to get out at the 90% projection level. So, as the market moves forward, we have two places we can adjust our Stops. One is on the upside, we can bring it closer, in case it turns around. Or on the bottom side, which is taking profits at a 90% Limit.
Now, we came in here and we Limited our situation out, so we're out of the market, with a $2,455.00 profit. As you mentioned earlier, the market is continuing to drop, so we actually limited our profit, didn't we?
So, we could have actually made a little bit more money, had we not put a Limit in. Maybe just continued with the trailing stop.
What else could we have done, here? What is another, "what if" scenario? Let's first go through and do our other traditional 123 scenario. Let's back the market up, notice I can do that with the Play Controls, over here.
Rather than putting our...rather than putting our.....Sell Stop Order, right at the break of this trend-line. At this upper trend-line, let's put it on a break below the number 2 line. So, if we do break it, put a Stop to enter the market on a break below the number 2 point, and we put our Stop up here above the number 3 point- Our risk is the distance between where we get into the market. Which is below the number 2 and above the number 3. That's an $1,800.00 risk. So, that's a very large risk for this small reward potential, that we're going to see if we get out at the 90% level.
So, now, as we move the market forward- we wait, we wait, we wait, and now we're in the market. Where are we going to put our Stop? At this point, we would put our Stop behind the number 3 point, we step the market forward. As the market moves in our favor, we can now actually adjust our Stop, bring it a little closer, so we're not quite so much money. We step the market forward, step the market forward, and again, we get stopped out at the 90%, on our Limit Order.
Now, this time we have a $1,390.00 profit. So, not quite as much money, because we didn't get in quite as early. We waited for a confirmation for the market to retrace, before we got in.
So, now, let's retrace, let's try this one more time. What else could we have done? Now, we could have come in, left our Stop up here, above the number 3 point. We could have came in, and we could have, we could have put an order right where we had it before. On a break below that trend-line. Right? Sell 1, and we could have come in here and we could have sold 1 on a break below the number 2 point. How about that idea?
Now, we could have taken advantage of both situations at the same time. Now, of course we step the market forward. We're selling 1, so we're in the market with 1. Put our Stop in here. 1 position, behind the number 3 point. We step the market forward, as it moves in our favor, we're now making $642.00, just like before. Step the market forward, again, step it forward, again. Now, we're filled on our 2nd position. Now, we need to put in a 2nd Stop. What we could do is we could come in here. There's several things we could do. We could adjust this Stop, come in here, right click on it and say Settings. Let's adjust it to 2, because we're short 2 positions. We Stop ourselves out with 2 positions. So, now we come in and we now have our Stop set at 2. As we move the market forward, you'll notice that we still have our Limit down here, at 90%. We have our Stop at 2. Then, we can drag this Stop Order down. Drag this Stop Order down behind areas of support and resistance.
As the market moves in our favor. Now, again, this time- we got Stopped out on a Limit. We only took profits on 1 contract, even though we're short 2. That means, that what happens, is we are now making money, not only off the 1 that we took profits off of the one that we limited out, but now we're still in the market with 1 position, that can continue to run.
Now, we can continue to run our Stop a little bit lower, but this time we don't need to Buy 2, because we took profits on 1. So, we right click on that order, we say Settings, let's change our Stop Order over to 1. Hit Okay.
Now, as that market continues to move down in our favor, we're going to continue to make additional money, on that 2nd contract that we didn't Limit ourselves out on.
So, as you see it's a very powerful tool, to be able to come in and break up and do multiple contracts and Buy them in at different times and sell them off at different times, throughout the trend.