If you ask 10 different traders for their favorite trading “setup” chances are you will get 10 different responses. Some rely on market profile or Auction Theory to trade successfully, others live and die by Elliott Wave Theory to make buy and sell decisions, and others still subscribe to Order Flow Analysis or tape reading to attempt to profit from day to day fluctuations in price. You will find your cycle fanatics, sentiment fanatics, algorithmic traders, point and figure specialists, and indicator junkies…
When in doubt just add 10 or 15 more studies to your chart right? Sure, why the hell not? It’s your money pal.
Being in this game for just over 10 years now, I have had the unique opportunity to see traders fail using every approach out there. EVERY single one.
Guys that day trade stocks using order flow? Yep.
People getting into the options market using Elliott Wave improperly? Absolutely.
Pair Traders? That was hot for a while, but I’ve only met one really good one in a decade.
Algo or “Black Box” programs that were successfully back tested but ended up having trouble with the “front testing?” Pretty much all of them…
E-minis traders that use moving average crosses? *shudders*
You get the idea. What is worse perhaps is that I have personally made the very same mistakes that were ruinous to so many of the traders and platform developers I have helped over the years. I’ve lost money of my own and money in a fund I am a partner in. Real money, and relatively, lots of money. I swore that my method of analyzing the market was the only way, or the best way. Reading that last sentence makes me question my own stupidity these days.
This is the very reason I am qualified to tell you, at the very least, that I don’t think it matters what style you swear by. If you are a trader, you are going to lose money. You’ll blow out of an account (or two or three) in the early stages, you’ll learn (or you won’t) and you will progress. The best you can hope for early on is that you find a way to shorten the learning curve and in doing so, decrease your “Trader Tuition” that you will inevitably pay.
All of that being said, there are a handful of trading setups that I have found have worked to greatly improve my chances of profiting. In our current market environment, one of low correlation among stocks, the following setup has worked particularly well…
We will term it “The Falling Wedge In The Context Of A Longer Term Uptrend With A Pullback To Fibonacci & Volume Point Of Control Support Confluence Zone Ready To Breakout” Indicator or the “FWICOLTUWPTFVPOCZRTBI” for short. Let’s break it
down with a chart of Las Vegas Sands $LVS…
The chart above is one of those examples of when “the stars align” for what I look for when looking to take a trade. You may remember some time ago I blogged about keeping my eye on the Resort and Casino group this time of year.
See Here: Time To Get Long(er) Resorts and Casinos?
With that theme in mind laid out in the above post, it was a matter of waiting patiently for my pitch. Here is what I saw:
A. Primary trend for the time frame in question is up.
B. Falling wedge pattern pulling back to near the support of the primary trend.
C. Pullback coming into and obeying the 78.6% Fibonacci Retracement of the August to November Rally.
D. Pullback coming into the VPOC (Volume Point of Control) in an area of Confluence with the Fib Zone mentioned above.
E. (Bonus) and I love this… Once we had the breakout up and out of the falling wedge, $LVS came back to retest the point of breakout. I used to fall for this retest of the breakout level and let it shake me out of a lot of trades, thinking a failed breakout was on our hands. Not anymore. As of late, I expect these pull back retests as part of my confirmation that I am correct. It makes me nervous now when I don’t get them.
Once we got that retest and faked out those playing for the breakout we were home free. Look what $LVS has done since:
And gone… $51 to $57 in 3 weeks when you are an options trader is something you don’t want to miss.
This is one example of the type of setup I am always on the lookout for. They work well when you find them. One thing you cannot do is settle for one that “kind of” has some of these characteristics, or take a “good enough” approach to trading.
Be selective, be picky, wait for your pitch, and with a little luck the stars will align.
