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A Lesson In Time
(or How To Trade Time Days)
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by Rick J. Ratchford
This is a general lesson on how to trade time days, and the author will
allow you to fill in the blanks as to what time days you use. For most
of these following techniques to work, however, the time days you choose
to use should do better than 70% in isolating a turn in the markets
within one day. When you start to go below 65%, you run the risk of
losing confidence in your time days and their source. Without a
confident source of time days, it will be difficult to trade with the
expectation that every time day will work, and that can ruin a good
trading plan using them.
Once you have found a good source of time days to work with, you must
then proceed with the assumption that ALL turns in the market that falls
on a time day or within one day of the date that was forecasted will not
be breached for at least a few days minimum. You must assume this if you
are going to develop the necessary skills in dealing with the results of
a time day, good or bad. Time day tops or bottoms are THE tops or
bottoms for the short term, no exception. From here we may proceed.
All examples in this lesson are based on a short term down trending
market. We know it to be a down trending market based on these rules. A
top is a top if it is higher in price to the tops of the previous 2 days
and 2 days afterwards. A bottom is a bottom if it is lower than the low
of the previous 2 days and 2 days afterwards. This is for defining
trends, not time day tops or bottoms which can be formed in one day
alone. So, our downtrend is when the short term market is making lower
bottoms and lower tops. For uptrends, which are higher bottoms and
higher tops than the previous bottoms and tops, you need to reverse what
is explained in this lesson. We will assume a downtrending market only
for simplicity. Again, all rules will be assuming just a down trending
market. Reverse for up trending markets.
Consider that we have a time day due today, and the previous days have
been going lower and lower up until now. Now it again makes a lower low
on our time day. Here are some rules to consider in this situation: 1)
We only trade in the direction of the short term trend. 2) We must
assume that we have a time day bottom. 3) If we are already short, we
should either tighten stops or exit now. 4) We must prepare for an
opportunity to enter this market in the direction of the trend within
the next few days.
A time day turn is a very important turn. It marks a significant price
level. When the trend is down and we have a time day bottom, we cannot
enter to go long because this would be against the trend. Yet, there
also exists the possibility that our time day is actually a time day top
instead, just one day late. In other words, the next day after the
assumed time day bottom the market makes a higher bottom and top. Then
the following day after that it resumes the downward move, possibly even
taking out the assumed time day bottom. What we have here is actually a
time day top just one day late, even though it was made only in one day.
Now here is how this time day would have been properly handled based on
simple rules. Rule #1 is that we only trade in the direction of the
trend. Therefore, we would not have tried to go long on this time day
low and then get knocked out the next day with a loss. The trend
dictates the TYPE of trades that we take using time days. We only SHORT
to enter the market. So when you have a time day bottom at the end of a
down trend, we first assume it is a time day bottom, and then we prepare
in case it is a one day top instead by watching what it does the next
day. If it happens to make a top at 23, 38 or 50% of the previous range,
this is a tip-off that we may be reading to head back down in the
direction of the trend. We then can either enter the next day after the
open if the top is not violated by going short or we can place our order
in below our time day bottom to get picked up. Either way, our stop is
placed above the top by a couple of points. What we are now doing is
assuming we have a time day top as well. The stop should be just above
the top to exit if we are wrong, and just below the time day bottom in
case it is broken through. You see, if our time day turns are violated,
this is significant in the direction of the trend, and a low risk exit
when in the opposite direction of the trend. One way we want to be in,
that is short in this down market, but out of the trade if our top is
really NOT a top afterall. Cheap. Once you go past one day after the
time day, you should no longer assume a rally top unless you happen to
have another time day which may mark it. Otherwise, you have a time day
bottom only to work with. Wait for the market to pick you up below the
time day bottom if it breaks through and you will usually go down for a
few days before the next correction. Exit stops should be place just
above the 24% price of the previous range from the time day bottom once
the entry is hit. The the market closes below the time day low, the next
day the exit stop can be place above the high of the day that broke
below the time day bottom. Breaking a time day bottom is significant if
you are using good time days. They aren't time days for nothing.
That was an example on how to deal with time days that fall opposing the
trend. Now let's consider how we treat time days that fall in line with
the trend. Our market is down trending and we are coming upon a time
day. Yet, a few days prior to the time day a bottom is formed and the
market then heads up. It is correcting, making a retracement of the last
run down. We then are expecting our time day to be a top. We are also
looking for price to meet with the time day. The key is price AND time.
One way to get price is just to do simple ratio math and find 23, 38 and
50% of the previous range. If on your time day you fall near one of
these values, you may have time and price. Some programs can help you
find support and resistance prices on a retracement. Be prepared. Now on
our time day we have also price that we calculated using a reliable
program. We can then enter the trade aggressively during the time day
high and hope it isn't going to make even a higher top to the next
resistance levels, or we can wait and verify by waiting the next day and
noting that the high does not seem to be threatend. We must assume that
on the time day it is the top and place our exit stops just above it.
Reason is that if you are stopped out, our time day top was invalid and
we don't want to trade this market. If you use realiable time days, you
should be confident in putting your stops just above that high since
your time days have come through for you on a regular basis. The trade
is short in the direction of the trend, and you want to look to tighten
stops or exit when you come back down to the last bottom prior to the
rally you're currently shorting if much resistance is being offered at
the level of the last bottom. We need to break cleanly through this
bottom to continue down. As long as lower bottoms and tops are made, we
look to short only, and we do so on retracement tops (or like our
earlier example, below time day bottoms.)
Again, just the reverse in the event of an up trending market.
Now at times you may have a time day bottom and another time day is due
soon. You expect that the next time day to be a top, yet after a rally
and a top is formed, the market falls and soon comes upon the next time
day as a bottom as well. The top was not a time day and so we don't
trade it. 4) Only trade on time days in the direction of the trend. We
had no time day for the top so we couldn't short it. Now we are back to
another time day bottom again. This time however, the assumed bottom is
HIGHER than the last bottom. We may be seeing the trend change. If the
bottom is formed on the time day at 23, 38 or 50 percent of the rally
range up, you can enter to go long with a stop below the time day bottom
for a low risk trade. The key is that we must cleanly break through the
last rally top on our way back up to have a good opportunity to win.
Once price reaches that price level prior to breaking through, move your
stop up to even plus commissions. It is now a free trade in case the
market is not changing trends. Absolutely no shorts should now be
considered unless not only does it fail going thru the rally top, it
must now make a lower low than your last time day bottom.
The key is learning to discipher the trend and to trade only time day
turns in the direction of the trend.
Now let's say we only have one time day and it is a bottom during a down
trend. Well, we can't go long since it is a down trending market. After
one day and it doesn't hit 23, 38 or 50% of the previous range down, we
pretty much eliminate a time day top one day off. Without another time
day due in a few days, we can place our short entry stop below the time
day bottom in the event that a break will move to the next level.
Breaking true time day turns are powerful.
Another event that occurs during time days, just not as frequently as
turns, is an acceleration day. Acceleration days are days with a bigger
than average move in the market for that day. By applying our trend
rule, we would not be on the wrong side of this move. Our trend is down
and we have a time day today. On this, instead of making a bottom, it
makes a very big drop. The following day instead of making a higher low
thus verifying our time day bottom, it makes a bottom also and the next
and the next. We had an acceleration day. Since we would not be looking
to go long, we are safely watching. If we were already short, we just
made a windfall profit if we only tighted stops and did not exit.
We look to only trade pullbacks and rallys which are moves against the
trend when they end on a time day, thus entering only in the direction
of the short term trend and placing our stops above the time day top.
These techniques will allow you to trade and profit with time days in
the direction of the trend as well as those opposing the trend. With
just a bit of practice, you'll be able to see this quite easily. I
completely enjoy trading with time days and will not do so without. It
is low risk with very high profitability. Just make sure you get good
time days and prices to work off of. The 23, 38 and 50% prices are rough
guidelines. There are even better techniques for finding price. But
either way, the time days are the real work horses, with these
techniques.
I wish you all a great amount of success.
cheers!
:)
rick
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