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Home / Futures Blog / A Trade Setup for the Times You Miss a Trade Setup

A Trade Setup for the Times You Miss a Trade Setup

October 3, 2013 by Scott Hoffman

This originally appeared as a blog post in Scott Hoffman’s Futures Insight Blog on Thursday, October 03, 2013.

Breakout setups are one of my favorite patterns to trade. However, even if you miss a market that has a breakout move session, the increased attention and market activity often creates a good trade setup in the following session as traders chase the previous day move.

Crude oil futures had a breakout setup on Tuesday. This was logical, given that the weekly EIA petroleum inventory is released on Wednesday. Tuesday’s breakout setup yielded a strong rally on Wednesday (in spite of a bearish EIA report, go figure). What did Wednesday’s rally tell us to anticipate for Thursday?

The Taylor Trading Technique (the basis for Swing Trader’s Insight) says that market moves end in “excess”, that irrationally exuberant or pessimistic traders push the market above or below “the fair value price”. This is what gets many traders to buy at the high or sell at the low of a move. It’s also a condition that the TTT seeks to identify and trade.

A breakout rally (as we saw in crude oil on Wednesday) tends to create an “excess high”, which the TTT seeks to trade as a Sell Short day. On a Sell Short day we look for one last push higher, taking the market above the high of the previous session (our “reference price). We anticipate this last push will fail and then look to go short when the market moves back below the previous session high.

I like to trade markets that still do some business in the pit. It’s not because I like to execute trades in the pit, rather, markets with a pit trade often make tradable moves around the time the pit opens. Stock index futures are a good example of this; on the stock market open the futures often give an entry based on a retest of an old high or low. This lets us look for trades during US trading hours, whereas with some markets trade entries may occur in the middle of the night.

CLX-daily-Oct.-3

Crude oil futures are a market with enough pit trading to give setups during the day (the crude oil pit opens at 8 AM CT). For November crude oil today, the Sell Short day signal meant we would look for a failed rally above Wednesday’s 104.23 high to give our short sale signal.

At 7 AM (when I’m usually in the office) crude remained below Wednesday’s high, so we could still look for the last push to get short. We got that move around 8:30 AM, as crude oil rallied in conjunction with stocks rallying into the stock market open.

Our short entry occurred shortly after 8:30 as CLX dropped back below Wednesday’s 104.23 high. Our initial stop loss went above today’s session high of 104.38. Our short entry was predicated on the high of the move being in so if it made a new high after our short entry then the market would prove us wrong.

However, we weren’t wrong this time, as crude pushed lower. The overnight session low of 103.45 was our first profit target; we could simply cover shorts there or use it as a reference price to gauge whether or not we should remain short.

Risk Disclosure

STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

Filed Under: Swing Trader's Insight

About Scott Hoffman

Scott graduated from the University of Chicago in 1986 with a degree in Economics. After graduation, Scott worked on the floor of the Chicago Mercantile Exchange then moved upstairs, serving as the personal broker to a former chairman of the Chicago Board of Trade. There, he worked as a broker and margin manager, starting up the firm’s full service brokerage division.

Today, Scott serves as an educator and mentor for new traders, and as a trading partner and ally for experienced traders. The breadth and depth of Scott’s knowledge make him the “go to guy” for both retail and institutional traders.

Scott also publishes two futures advisories, Swing Trader’s Insight and Trade or Fade. He also writes the futures trading blog at www.futuresinsightblog.com. Scott has written articles for a number of futures publications and has done numerous futures trading seminars, including seminars for both the CBOT and CME.

Scott offers his customers the knowledge he has gained from his more than 25 years of experience in the futures business. Scott is accepting new clients at this time.

Scott lives in suburban Chicago with his wife and three children. In his free time he enjoys coaching his children’s sports and various other athletic activities.

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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