TRO BUY ZONE - KEEP IT SIMPLE

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TheRumpledOne
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Postby TheRumpledOne » Mon Oct 29, 2007 8:10 pm

MIND THE GAP!!
How to trade gaps in Stock Market Charts


There are four types of gaps :

Common Gap
Breakaway Gap
Runaway
Exhaustion


Gaps are formed on daily bar charts where no trading has taken place. In an upside gap for example, a gap would be formed if the open is higher than the previous bar?s high (Murphy definition). A downside gap would be formed if the open was lower than the previous bar?s low. These initial gapping moves form true gaps when at the end of that trading day the gap is left unfilled. So in an upside gap, today?s low is higher than the previous bar?s high, in a downside gap today?s high is lower than the previous bar?s low.

Common myth: All gaps must be filled. This a very tempting intra-day strategy but is strictly speaking, not true.

Common Gap
This type of gap generally occurs in the middle of trading ranges or in thinly traded markets. Chartists tend to ignore the common gap but futures traders are always keen to use the common gap with the following points in mind:
1.Every gap must be filled ? which remember is not strictly speaking true
2.The gap high and low and even the close and open can be used as support and resistance levels.
3.Common gaps offer little to trend analysis or confirmation of a pattern breakout or reversal and are usually ignored by chartists.


Breakaway Gap


This type of gap can occur at the completion of a significant pattern. A breakaway gap gives a strong signal that the market has started a new trend or phase of a trend. This gap has more significance if it is left unfilled, and should remain ?unclosed? to have validity. On an upside gap, the high of the previous bar (the gap low) is considered to be strong support. On a downside gap the low of the previous bar is considered to be strong resistance.

1.Breakaway gaps are seen as patterns are completed and stops are triggered, the market may be receiving a ?shock?.
2.Breakaway gaps can be used as support or resistance as orders will be left at these levels to cut losses or initiate trades.
3.Once the breakaway gap is confirmed (the gap holds on a test) the trend move should be strong.


Runaway Gap
Once the trend is underway prices may leap forward to form a gap or even a series of gaps. This may have some strong volume associated with it. The runaway gap offers the same support and resistance studies that the breakaway gap does.
1.The runaway gap sometimes occurs in the middle of the trend move and can be a ?measuring gap?.
2.The runaway gap occurs as the trend gathers more ?believers?, new funds flow into the market to re-enforce the trend.
3.The runaway gap also occurs as ?stale? longs or shorts cut their positions and take their losses. This can be on the back of news, shocks to supply/demand, or simply too much ?pain? in existing positions.Exhaustion Gap


Once the trend is well established and most targets/objectives have been met, an exhaustion gap may be seen. This will appear like another runaway gap, but the price action will be critical. Basically, once the gap is seen, but is then filled and closed, the exhaustion gap could be in place.
1.Exhaustion gap is seen at the end of the trend move.
2.Exhaustion gap is confirmed as the gap is filled and closed.
3.Exhaustion gap signals a trend change


Island reversals

Island reversals occur when the market gaps higher with an upward exhaustion gap (or lower with a downwards exhaustion gap), trades in a narrow range for a few days and then gaps lower again. This leaves an ?island? of prices, surrounded by unfilled space and usually signals a trend reversal.

Opening Gaps are worth watching out for in intraday trading, but dont get too obsessed with them!!

http://www.livecharts.co.uk/articles/gaps.php
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!

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Postby Ken_S » Mon Oct 29, 2007 8:47 pm

True, but I would have been in the short because it passed down into the short zone first. I guess I'm looking for what the stop loss would be for these types of trades that run against us. No way to "know"... I guess just have to follow price action, HH, etc., and cut the loss at some point.

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Postby TheRumpledOne » Mon Oct 29, 2007 8:55 pm

Ken:

You can STOP LOSS at the OPEN for a .10 - .20 loss

You can STOP LOSS at the LONG BOTTOM for a .20 - .30 loss

You can STOP LOSS at the LONG TOP for a .30 - .40 loss

Or, if you are SHORT and it reverses, you can exit the SHORT and enter the LONG in the LONG ZONE.
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!



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AAPL 10/29

Postby fcg0lfer » Tue Oct 30, 2007 3:38 am

Hello Avery,

I know you've seen me pop into Paltalk the past few days. I want to say thanks a bunch for all the EL indicators and for generously sharing your knowledge. I love your keep it simple approach!

I have been testing out buyzone the past few weeks and so far it has been very successful. I have been using the open price as my stop. I usually dump half my shares at a target 0.25-0.50 depending on how fast its moving, and then trail the rest with an amt of 0.1-0.2 once again depending on how shes moving.
This morning was a little rough however. I took about 0.45 on the first push into the buyzone. Then on the second one marked "greedy" I think I should have taken a profit but I ended up with a small loss. After that, the price whipsaws back and forth a few times, just entering the buyzone and the sellzone with little to no room for a profit, which caused me to get stopped out several times, giving up some of my initial gains :(.
My question is, is my stop too tight? Did I get greedy and should have quit after the first very profitable trade lol :roll: , or is this something that just happens occasionally?, if so how do you try to avoid it?
Thanks!
Frank



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Postby TheRumpledOne » Tue Oct 30, 2007 4:23 am

You tell me... is your stop too tight?

Are you greedy?

Why didn't you take a profit?
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!



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Postby fcg0lfer » Tue Oct 30, 2007 12:56 pm

I think it was a combination of greediness but mostly not acting fast enough(it happened very quickly). From now on after a whipsaw I think I am going to sit tight and wait and see what happens.
Might also play with loosening stop a little bit too.

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Postby TheRumpledOne » Wed Oct 31, 2007 11:31 am

Image

Look at the HiOp ( high - open ) and OpLo ( open - low ) columns.

Do you see it?
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!



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Postby TheRumpledOne » Thu Nov 01, 2007 1:34 am



One of the guys in my chatroom was saying how there wasn't any more buyzone trades. He wanted to move the lines. I replied that you should have been done in the first hour anyway but just wait.

Notice there were some nice buyzone trade later in the day (FOMC rate announcement).

To use the Buy Zone profitably, one must learn to wait.
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!



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Postby traderjeffb » Thu Nov 01, 2007 6:35 am

Ken_S
it might be best if you take time and review the Buy Zone material here on the website. Below is a copy of the same date you posted earlier AAPL 7-05. This chart is a 25 tick chart ...it appears to me the price barely entered the short area of the indicator-the double blue lines
and it appears that the first trade that should have been take was the long when it headed up into the buy zone



additionally...you mentioned:
___________
It closed up $4.00 for the day, so it would have lost 40x the .10/day target. I know, so make the retrace .12
___________
and again later you say:
__________
I guess just have to follow price action, HH, etc., and cut the loss at some point.
__________
Are you trying to use the Buy Zone indicator for more than a scalp? It's designed for a pirate... get in -plunder -pillage and get out with a profit -quick!
The lines on my graph are 0.20 apart so if you look at the 2nd bar above the double yellow lines the price is 0.10 above the buy zone -profit is taken...you have just made $100 (for 1000 shares) in less than 1 minutes. TRO suggests make $100 then after you are consistant try for $200 ...on and on... one can see with a little trading skill one could use a trailing stop and probably capture $500(for 1000 shares) and still been out in 2minutes.
Even if you did go short when the price dipped 1 cent into the short zone you could have used a .10 stop - gotten stopped out and taken the long trade a few seconds later and broke even(if you took profit at + .10)

hope this helps
Jeff

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Postby Ken_S » Fri Nov 02, 2007 2:13 am

Thanks Jeff,

"it appears that the first trade that should have been take was the long when it headed up into the buy zone "
Not to beat a dead horse, but the price entered the sell zone first, so why wouldn't you have gone short. Hindsight tells use it just barely entered the sell zone.
The problem is mostly me not keeping stops and/or being greedy. Just trying to come to some firm rules for exits as I think others are too.
Thanks again,
Ken

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