This originally appeared as a blog post in Scott Hoffman’s Futures Insight Blog on Monday, June 05, 2012.
Years ago I read an article that Larry Connors wrote about a trade setup he called “If They’re Late, They’re Dead”. I can’t remember how his setup worked but the name is a good way to think of what to do with breakout trades. Breakouts tend to be trades that work if you can get in on them early but if you’re late you can get your head handed to you. If you can identify what’s “too late” and anticipate what the market will do to traders who were “too late” you can take advantage of the market’s reaction.
Gold and silver futures had a breakout setup on Thursday and then had two breakout moves on Friday – first down and then a strong rally in the second half of the session as they closed near the session high. Friday’s rally really brought out the bullish commentary as the talking heads asked if the rally was a sign that the metals might finally be acting as a safe haven investment.
I hate trying to trade off stuff like that. While I listen to fundamental talk about the markets, I believe that the markets usually do a good job of pricing in the fundamental picture. By sticking to anticipating what the market may do and basing trades off price action it’s easier to stay away from subjective decision making.
Looking at the July silver, Friday’s high at 2868 was the price to watch for today’s direction. If it was going to trade higher it would have to trade over Friday’s high. That sounds pretty fundamental but it was good evidence of market psychology for today.
When I got in this morning, silver futures had opened at Friday’s high and then headed lower. As the morning’s trend was lower I looked for a reference price for confirmation of the downtrend. I used Thursday’s high of 2819. It was an upside breakout point for Friday’s rally; a move back below there would mean anyone who bought that breakout would see a winner start becoming a loser. The lower the market went the larger their loss (and more likely to sell out).
We sold short when 2819 was taken out; it pretty quickly fell to a session low at 2803.5. Around 11:30 AM it took out that low, making the session low at 2795.5. We wanted to stay short to see if it could test the Fibonacci retracement level at 2792.5. However, we didn’t want to give back too much profit so we put in a stop loss to cover our shorts if it traded back over the first session low (2803.5). This was hit shortly before noon and we were stopped out for a profit.
© Scott Hoffman
Subscribe to the "Swing Trader’s Insight" for more powerful trading insights!
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to receive a free two week trial, register here!