Trading Trending Markets using Median Lines 

Summary:  John Lynch aka KIWITRADER Aug 2001

 back to Tim Morge         

Overall Philosophy

I always try to take trades with good trade location. If I can't get a trade location that's ideal, I generally pass on the trade. If I do take a trade with trade location that is acceptable, but not as ideal as I originally planned, I trade with less leverage. I never take trades where I can't define both the stop area that is acceptable and at least one area that is a good logical profit objective. Never chase price. There will always be another trade setup. When I am not in rhythm with the market, I don't trade. Forcing trades is one of the worst sins. Time invested in trades is expensive. If a trade is becoming stale and not progressing as I thought it would when I put the position on, it's best to go flat. Being flat can be a much more creative state of mind, and stale trades just tie up your capital and your mind.

Finally, If I don't feel good, I don't trade. And I mean emotionally good, physically good-any distractions mean that I am not at my very best. And to trade these markets day in and day out, I have to be ready, with good tools and a good mind.

Drawing Trendlines

When drawing MLs don't assume these price levels will be respected, but wait for evidence that the lines I'm looking at are being proven by price action, before I consider initiating a trade.

80% of the time the price will reach the median line when using ABC on major pivots.

 Signs of strength include gaps, large range bars, zooms thru the median line. Other shows of strength: Price tests the Lower ML of an up sloping Median line and then begins trading up and has no trouble running through the Median line--if it doesn't immediately retrace back to the Median line, it's going to the Upper Median line. The probability is 80 percent once it's closed above the Median line for the third day.

 When price is reaching up to test a median line, failure to reach it is a sign of weakness.  This indicates it will approach the lower line (and overshoot it by the amount it missed the upper line).

Entries

When Trend has been established buy and sell at Median Lines. Buy when price briefly touches the support of the up-sloping median line. Tim chooses to limit in but you can stop in if you want.

 Entry targets with 10% of ML/MLH range allowed for failure to reach it.

 When the median line is zoomed then buy the retest.

 If it reaches the UML and then falls back to the ML buy at the ML.

 Enter trades at a price of your choosing, when possible, which means when you see a trade that you identify that has several degrees of confluence you usually have limit orders in the market before price even gets to those areas. Confluence of a minor median line and fib retracements give a good entry.

 Don't wait for a bounce or reversal to get in. I like to have good trade location. Having good trade location can cover many sins. When that isn't possible, I'll have a stop order working below or above the market to stop me into the market with smaller size, at least on trades that I feel are high probability trades. If I can't enter with good trade location, I usually reduce position size.

Entering Coils

When price makes a big run, begin thinking that either a retracement is due OR that price will begin to coil

Exits

Not looking for king hits.  Take easy trades for acceptable higher probability profits.  You may take multiple exits (say 61.8%, ML intersection and trend follower).

 Stop at the prior minor pivot low (3 ticks under).  Profit target just under current median line intersection. When you have a nice profit and don’t want to give it back you can move stop up to just below the prior swing high.

 Tims 3 ticks on the s&p = .75 vs bar range of 3-5  = 1/6-1/4 bar.

First, remember that that slide presentation used only the basic Median Line for trade selection and techniques. The measuring technique I showed there is extremely simple but is also very powerful. Most traders don't take the time to orient themselves by noting where the intersections with the Median Line and MLHs are. This also points out the thought process of trying to anticipate price movement and so plan for potential moves.

 The placement of stop and profit orders is an art. But let me make some generalizations about what I do when trading my own account:

1. I always use stop orders and I enter those at the same time I place the orders to enter the market.

2. I rarely snug my stops to break even just to move them to break even. Instead, I look for areas that I consider to be natural support or resistance. I then place my stops close to those areas, utilizing the "protection" these areas may give. If you read my commentaries, you'll see all sorts of different bar patterns, lines, patterns, etc that I use for this purpose. As I said, its an art.

I also always have profit objectives in hand before I enter the trade. I like pre-defined trades.

How do you manage a trade like this if price approaches your objective but falls short, then starts to rally back against you?

Certainly if it moves in my favor and then starts to rally abruptly 10, 12, 15 handles against my short I'm stripping off contracts on that rally; on the other hand as it approaches my objective and I see structure (swing tops) or retracement levels to lean against I start lowering stops to lock in profits above these points of resistance.

 How do you decide how big your target should be?  I think the difference lies in how I see markets in terms of expressions of energy: "spent energy" vs. "stored energy". The first trade came right after the market had been in a trading range and had stored energy in the coiling range (A-to-Y on the first chart). The second trade came after the market had spent a great deal of energy (Y-to-C) and had little or no motion that would indicate it was re-storing energy. Once price tested the lower down-sloping ML, there was a strong rally. The price action appeared to act more like a two-way trading range day as opposed to a one-way trend day. I decided to emphasize taking quick profits, especially if price was unable to break below the early morning low of 1098.50 at C.

Money Management

I always have a stop in place. I usually start with a disaster stop. I rarely risk more than 2 percent of capital on a position and that disaster stop is rarely hit. I like to take money off of the table and once trades become profitable and I have some time invested in them, I am careful to keep the trades from turning into losses. If I violate my trading rules, I always take a minimum of three trading days away from the markets--to clear my mind. I would always rather under-leverage than over-leverage.

Special Situations

The trick to trading this "rolling chop"? Know before you initiate a trade there will be these rallies (such as at G, I, K & O) and so look to lock in profits on the sell-offs (such as at H, J, L, N & P). Only sell into resistance-never chase the market lower. And use lower leverage, so that if you do get out of step with the market in this dance up and down, you can survive a test of at least one prior swing high.