Because of the leverage inherent in Futures, and because of the size and power of the opponents you are up against, the only way you can play and win against these guys is by being extremely nimble. This means you have to think and act in a way that does not come naturally to most.
You can get in and out as quickly, and as many times as you please. This is your advantage, something the Banksters can't take away from you. The problem lies within most traders psychology whereby they feel punished for having to admit defeat by "taking a loss".
But you are not taking a loss. What you are doing is taking cover before returning fire. You are mucking a bad hand in poker. You are throwing the ball away on first down. No damage sustained, and we move onto the next hand.
Before we continue, I'd like to comment that our focus in this lesson is only on exit and re-entry. We know that before we enter a Long or Short Position that you already have a Unified Consensus across multiple indicators that are pointing to your decision to go long or short.
So once you get in, how do you know when you are beat?
Well, the first answer to the question is that it starts with a mindset - This mindset is a commitment to defense. It's a commitment to knowing that there is a 50% chance your timing is wrong and you will have to exit at a loss. It's a commitment to monitoring your trades when you are winning - watching your positions like a hawk so that you don't give back hard earned gains. Most importantly it's a commitment to deciding these exit points before you enter the trade.
For our Trading Program there are 4 Tools we use, and so can you. Which one you go with will be the one that suits you and your trading personality the best.
Option # 1 - Use the MA Channel Report in Alchymist.
Each day we publish 3 Adaptive Moving Average Channels along with the pivot points to trade off of for that day. It's a proprietary indicator designed to ascertain the short to intermediate term trend.
For those who want to employ a longer term strategy, simply switch to the weekly view, which is calculated on a 4/9/23 Weekly basis as opposed to daily.
The Channel Pivot points are what you trade off of for that day. Channels do the following:
- Determine current trend in specified time frame based on their slope, as well as price location relative to slope. So if the channels are sloping up, with price closing above the high channel, this is a clear uptrend and your mindset here should be to look for long entries on pullbacks to the channel lines. If prices close below an upward sloping channel, you still must respect the trend, and be prepared for a crossover back over to continue the upward trend. The key here is to not fight the trend of the adaptive channels. You trade with them, or are neutral, but not against them.
- Provide you with trend signals across multiple time frames depending on your preferred frequency of trading. So for example, you may decide to use the 23 daily channel to determine trend, but use the 4 day channel for entry/exit signals.
- They provide 1 piece to the technical puzzle, as you seek unity across numerous indicators to signal trade direction.
As you have 3 channels at differing time frames you can trade the progression through all 3 of them or you can stay with one time frame. Lets view an example on how this works as we look at a chart of Gold that has been in a Impulsive Down move, and sitting below the pivot points of the 23 MA Channels.
There are some key things to highlight here:
- You can see the negative force that a down sloping 23Day channel exerts on price. Price rallied above the 23day lower channel line, and then upper channel line, but the slope of the channel is still clearly down, and this continued to exert negative pressure on price. So in this case if you are short, you may cover 1 unit on crossover of the lower line, and then a second unit on a cross of the upper line. However, you are aware of the negative technical profile, so are ready to re-enter shorts on a cross back below the channel lines.
What if you were getting strong odds to place a long bet here, against the clearly visible trend? - Then what? We have 3 options.
A) Revert to a shorter time frame - use the 4 day channel and pivots. Since it is a faster signal conducive to shorter term trading it will get you in AND out much quicker. This is our preferred method for counter trend trading.
B) Continue to use the 23day channel pivots - buying on crossovers, but playing with tight stops and exiting if price reverses back through, signaling a continuation of the prevailing trend.
C) Go long futures but hedge with long dated "At the Money" puts. You can ride out the downtrend knowing you have set your max loss.
We want to stress that in such a status where the Trend in Down, and Prices are below the pivots, you do not want to be entering long positions here - No matter what your setup is telling you, don't try to be a bottom caller or top picker. You only take action as price interacts with those pivots, by either crossing over them or being repelled by them. Don't be impatient - Let price come to you & put you into the trade as opposed to you chasing after it.
If you must move, then drop down to a lower time frame and use those pivots, but understanding that they are "faster" and may lead to more whipsaws.
Final Note on Channels
An additional benefit to using the Channel pivots for exit/entry is that they are dynamic and moving with the trend. So in a uptrend your exit keeps moving higher along with the market, and vice versa for downtrends.
This will help you to maximize your profits on any open positions, and avoid giving too much back.
Options # 2 - Use the Pivot Trend Report in Alchymist
Mutual Funds, Pension Fund, and Hedge Funds are the Elephants in the room. Because of their sheer size, any buying and selling can create waves and impact markets. This can be even more so pronounced in smaller markets that are thinly traded.
But what impacts their buying & selling decisions? The answer is 2 primary factors.
1 - Their risk management and trade management activity is a primary driving force. This is what we tend to spend the most time analyzing, and it's what drives our own buy/sell decisions. The big players are constantly monitoring their Risk positions and then trading in accordance with their Risk Management & Asset Allocation Strategies.
2 - There is a Second driving force, which is a much less discussed reason for trading activity - Mechanical Calendar Driven based buying & selling. Examples of this may be:
A - Institutions make cash distributions regularly to investors or pension beneficiaries with end of month being a popular time for payment. So they will be liquidating positions to raise cash to meet these obligations.
B - Retirement Plan Participants, such as 401k contributors, get paychecks at month end with plan contributions deducted. The contributions are now in the cash pool of various funds and Institutions, who then look to allocate towards various investments.
C - Hedge Fund Redemption Requests as well as fund inflows occur around month ends. Whether it be due to poor performance, re-balancing of investment mix, or investors simply need to raise cash for general purposes - these will all cause forced liquidations of positions. On the other side, Funds may have excess cash that needs to be put to use when receiving regular inflows.
D - Many types of Corporate income distributions occur at or near month ends as well. Common Stock Dividends, Preferred Stock Dividends, Interest & Principal Payment on Fixed Income Assets are typically paid on the first or last business day of the month. Investors now have cash, and will look to allocate it.
All of this activity leads to what can be referred to as the "Regularity of Payments and Investments." Said, another way, due to this regularity of payments, we are able to identify cyclic patterns for when the elephants in the room are being active and declaring their position.
If Funds & Institutions have to allocate cash at regular intervals then it behooves us to pay particular attention to what is happening in the various markets during these respective time periods. In a sense, it's like sitting down at the Poker table with elephants on either side. And now for the first few hands you observe how they are betting.
This same principal applies to the beginning of the calendar year, as well as the beginning of each week for all of the short term traders. It is during these times that we want to monitor volume, open interest activity at various price levels, and then monitor how price interacts at those pivot points. Once we have determined these key pivot points we update the trends across the various time periods which are:
- Weekly Range, which we will refer to as "WR"
- Monthly Range1 or "MR1"
- Monthly Range2 or "MR2"
- Yearly Range or "YR"
What you want to be monitoring is the trend signal across these cyclic pivot points, and use this as another signal to confirm your trade thesis. Depending on your time frame, you want to monitor the Range Trends and ensure you are trading with them or in a neutral stance - And not trading against them.
When price is above the High Pivot, the trend will be green and you want to be entering longs or hold neutral positions. When price is below the Low pivot you want to be getting short and exiting longs. When in between the pivots, you stay neutral or begin scaling into or out of positions.
Example of Pivot Trends
1 - In a trending Market, or one that is entering a Impulsive move, the Range Trend will confirm that move. So if your indicators and research are telling you to make a bet, then this Cyclic analysis of fund flows should confirm this decision. Further, you also have a signal for exit if the Range Trends turn against you. In this case, you simply wait for the monthly or weekly trend to turn back in your direction again before re-entering the position.
2 - Head-fakes and false breakouts are the norm these days as we have discussed previously - Bankster and Hedge Fund algos at work. We have observed price closes above or below the respective high/lows pivots, only to then reverse at some point during that same period and head in the other direction. While this can be frustrating as your account experiences whipsaws, it also alerts us to a potentially powerful reversal in the other direction. It reminds me of how NASA will direct a probe into a distant planet's orbit to help it generate speed, before then whipping it out of that orbit towards the desired destination with a tremendous increase in speed and force - the same concept applies here.
Remember, Large funds and players are putting money to work in regular cyclic intervals - They are tipping their hand as to what they are buying or selling and the Range Trend Report is locating these inflection points and trade bias. Trend followers and other traders are then following this momentum and exacerbating the move of the elephants. If this move stalls and then reverses back through those pivots and signals a reversal in trend, this means that funds are now sitting on a loss position.
Most experienced traders will not want gains to morph into losses - So as these profitable trades now reverse back into their buy/sell ranges, they will liquidate the position. Trend followers and other traders then pile on and now a new trend is created opposite from the original direction.
In conclusion, this report monitors cyclic fund flows over multiple time frames, and notifies you when there is a change in trend. Your job is to monitor these levels daily and risk manage your positions accordingly. Just like you do a traffic light, you go on green, & stop (or sell) on red. As a final closing thought, there is simply no reason for you to be short an asset when the Pivot Trend is up or be long an asset if the trend is down.
In order for your analysis to be correct, the cyclic flow of funds will always first have to confirm your view. i.e. if you are bullish on Gold while it's falling toward 1200, and you believe it's going to 1400 or higher - as a simple matter of fact it cannot march towards your target without first turning the MR1 and MR2 up!
So stay patient, and wait for this to happen as opposed to bottom fishing - This will preserve your precious chip stack.
Further, if you have been riding a position higher like the Naz chart above, and you believe it is still going much higher - if the pivot trend turns down, you simply must scale out or completely close your position. As long as that trend is down, your position cannot march higher; rather you will be giving back chunks of your gains. So you will find that using this report for profit taking levels on winning positions will also be an invaluable tool.
If only we had used this technique with Silver in 2011, it would have saved us a fortune & Years of heartache!
Option 3 - Use Round Numbers as Pivot Points
This is a very simple technique, with different levels for each individual market. Your Pivot points are any round number or increment that you want to trade in. So for example, with Crude Oil it may be every Dollar; for Silver it may be every dollar or every 50 cents.
The concept is you use these round numbers as pivots, and act on them. Lets walk through an example.
Lets say all of your indicators are in consensus and are telling you to go long Silver, which is currently trading at $16.30. Problem is, you are not sure where to get in, or once you are in, where to scale out.
In this instance you decide to use 50 cent increments. So, if silver starts moving higher and crosses 16.50, you then start buying, using that level as your (mental) stop loss. As long as prices stay above 16.50 then you keep that unit - if it trades below, you get out - No questions asked.
If instead silver continued to drift lower towards 16, you would only be a buyer if it went below 16 first, and then crossed back over - You would then use $16 as your pivot for entry and exit.
This technique, is simple, elegant and effective. You will be tuned into the market with tight stops on every unit you purchase. And can use them for profit taking levels as well. So lets say in this example you go long at 16.50 and prices move to 17.67 and start to stall, now drifting back towards 17.50 - what do you do?
Answer is you close out on a move below the 17.50 pivot & lock in your gain. Don't be scared of missing anything - You can always re-enter when it crosses 17.50 again.
Option 4 - Use the Fib Retrace Levels as Pivot Points
As we discussed in our lesson on wave counts, we know that price moves will retrace 1/3 to 2/3 of it's move, prior to resuming the Impulsive move. As this happens and you are using your Fib lines to monitor retrace levels, you can use those levels as pivot points to add or exit a position.
The principal behind exit and entry is exactly the same as the first 3 options.
As you develop your trading game, it is key is that you stay consistent and continue to use particular setups consistently . It's only over 1,000 or more coin flips that you will see a 50/50 distribution of heads or tails. If you flip 10-20 only, you could statistically speaking flip 20 tails in a row - You cannot then reverse course, otherwise you will miss the reversion back to the statistical mean.
We will note that in the best setups you will see the monthly ranges, channel lines, as well as Fib levels from wave counts coalescing around the same level. This makes that Pivot point that much more important, and we are always on alert for this type of Unity across various Pivot Points - you should be too.
Understand that all of these Pivot Point options are your signposts and traffic lights directing you to stop or go - Nothing more, Nothing Less.
Therefore, the critical point behind their use is your ability to obey the signals. You must stay consistent, enter when signaled & immediately exit when the trade goes against you, which will also be signaled.
Don't argue the levels and don't argue market behavior. Just act. If you do so, you will duck on the times that the market goes against you, and you will participate when the market rallies in your direction.
Consistently follow the traffic lights, every time, and you will get to your destination without suffering a wreck!
Green means Go, Red means Stop - Easy enough, no?