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Friday, December 10, 2010

Airelon's Challenge Chronicles 3.9: An Explanation

So what is "Airelon's Challenge Chronicles"? You can find a description by clicking here.

I have a few tools, which, believe it or not, I have yet to reveal. Even after nearly four years of blogging.

Some of these tools I've hinted at, and a few folks have come to know about them. One of them I developed from two or three other tools. I call it an "S Swing" Point. Since there are a handful of folks that are aware of this tool, I figure it would only be fair to freely disseminate the specifics of this tool in today's blog entry ...

(Reprinted from my own "Airelon's Market Tactics of November 16, 2009")

“The S Swing Point”
“The future is something which everyone reaches at the rate of sixty minutes an hour, whatever he does, whoever he is” - C. S. Lewis

As I have related many times, Larry Williams was the market educator who sort of “set my head on straight”. I always appreciated the fact that Larry always suggested we, his students, develop the ability to create our own technical tools. One way to do this? Is to take the bits and pieces of other technical tools and combine them with other ideas and theories.

I wish to now discuss what is probably one of my favorite tools. I call it a “S Swing Point”. I use it primarily as an entrance timing tool, or trigger, since I am a swing point, or “pivot” trader. So when I put into use, a “S Swing Point”, I'm using it as a pivot entrance. I wanted to talk about it's construction early on in the history of this newsletter, for my new subscribers.

Let's begin by talking theory. No, I'm not going to delve into mathematics too heavily. But let's just rationally and logically discuss what many of us are already aware of when it comes to trading, and market theory. We know that there are two aspects to a market, that all intelligent traders are concerned with. One is price. What price level can I obtain a particular security or derivative? From this, we have the basic concepts of support and resistance. The other aspect is that of time. What time will it be opportune to step in and buy a particular security and derivative?

There have been arguments for decades, as to which aspect of trading is more important. Time. Or Price? Back and forth. I personally am skewed towards the aspect of time.

But there are are many such arguments in this industry. Technical analysis versus fundamental analysis. Investing versus trading. I am the type of person who always looks for a “win win” scenario. As I explained last week with the “three sisters”, I am a trader. I'm also an investor. In other words, I don't trade exclusively. Nor do I invest exclusively. I see “trading versus investing” arguments as pointless. Why not do both, and recognize the strengths and weaknesses of each. The same is true with technical and fundamental analysis. I trade technically, and fundamentally. I look for “win win” scenarios.

So let's apply that to the argument of time versus price. What if we could develop a tool that looks for an area of price and time? This should in fact be the goal of every trader and investor.

One tool of Larry's that I've always enjoyed, is his 1.28 rule, which concerns itself with time. Let's talk about the 1.28 rule a bit, as it is the basis for my “S Swing Point”. At the same time, I hope to demonstrate this concept in action. That is, how to develop your own tools from the parts of other tools.

We all notice that the market swings between highs and lows. Pretty basic. The highest highs, and lowest lows of these market swings become known as “swing points” or “pivot points”. Myself, since I'm an old-school guy, I prefer the term “swing points”. At times, the market swings behave orderly. Let's take a look at December Corn [this is from 2009] for example on the Daily Chart as it appeared on Wednesday night …

Notice that the swing points come at seemingly equidistant points in time. Of course notice too, in price that at times, the market will hover near a support or resistance level, and hold. But support and resistance lines are never exact. It will pop a little bit below a support level, fool a bunch of traders with what is commonly referred to as a “squeeze” and then head higher. Neither do the swing points arrive in equidistant moments in time. The cycles are off, by just a small amount. The 1.28 rule attempts to quantify the “off” aspect of the timing of the
swing points.

Take for example the two low swing points on November the 2nd, and November the 6th on the following daily chart. Between these swing point lows, is a swing point high. Regardless, to find the next high using the 1.28 rule, take the number of days between the swing point lows, and multiply that number by 1.28. Thus, 4 * 1.28 = 5.12. You then count 5.12 days forward, from the swing point high on November the 4th.

And as we see this week [remembering this is a reprint from 2009], we got a reversal at the 1.28 rule that was most definitely 'tradeable'. In fact, if you note my Tweets last week [2009], as well as my free “Week in Review” podcast [2009], you'll note that this is a market that I just “creamed” (Sorry, couldn't resist).

But the 1.28 rule has it's drawbacks. It's not exact as it works best at causing you to look at a particular time period, but says nothing about price. And let's face it … even when considering the time aspect, the market simply cannot function off a basis of pure 1.28 swing points. Random news events arise, and the market enters periods of extreme volatility in which swing points, or pivot points are 'thrown to the wind' as it were.

I therefore decided to start reinforcing this concept of “time and price” with another tool I developed when one day, I was sort of fooling around with Fibonnaci Fans with one of my brokers platforms, from the swing points I was using for 1.28 construction. I began to notice that at certain times the 50% line of the Fibonnaci Fan that bisects the forward swing points would intersect with the 1.28 reversal day.

Simply bisect points b and c by 50%. These 50% bisections will point to a price level. And if you notice, this bisection will often point to a price level that is right past the support or resistance level.

This is why I tell people, that support and resistance are not an exact lines of price, simply because XYZ is at $10.00. This is why I refer to them 'zones' of support and resistance. If XYZ is at $10.00, it doesn't mean that the resistance is $10.00, and $10.01, that XYZ's resistance has been violated. In fact, over the years I noted thousands of examples that this bisection tool points to true areas of resistance or support. But the bisection tool is not to be used alone. Again, only when used in conjunction with the 1.28 rule.

I usually begin to use this tool after I have examined other filters. As I mentioned last week to better increase my edge I use as filters ...
  • Seasonality: Seasonal tendencies occur in the market, and I study both the strength, and dependability of annual, seasonal moves.
  • Larger Trend and Market Cycles
  • Commitment of Traders Report
So I apply this as one of my tools, in such situations. Thus, we arrive at the end result. An “'S' Swing Point”. I just got in the habit of calling it a “S” Swing point, as I developed it (my last name), and the fact that I begin using this entry tool when definite Seasonal dates approach a market that I am 'stalking' according to my bias, or edge filters.

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Note: The above statements should not be construed as an investment or trading recommendation. Airelon's Investing and Trading Journal is a blog that allows subscribers to look 'over my shoulder' as it were, for my own personal specific trading and investing ideas and thoughts for the next week. But they are only thoughts as of the moment of publication, and are subject to change.. Any trades or investments that I discuss within this blog are simply my own thoughts regarding my own investing and trading outlook. Remember that entering any market is an individual decision. There is no guarantee that I will enter, or have entered any of the trading or investing ideas that I discuss in this blog; as larger accounts may require a different strategy as the ones presented here. This blog simply contains my trading and investing thoughts for the next week. I, the author do not grant this work for wide distribution beyond any single individual subscriber as this publication is protected by U.S. And International Copyright laws. All rights reserved. No license is granted to the user except for the user's personal use. No part of this publication or its contents may be copied, downloaded, stored in a retrieval system, further transmitted or otherwise reproduced, stored, disseminated, transferred, or used, in any form or by any means except as permitted under the original subscription agreement or with prior written permission. I personally only enter any market after watching and reading the tape and I trade using money management principles. The losses in trading can be very real, and depending on the investment vehicle and market, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 14 years of experience in trading and investing in these markets. Airelon's Challenge Chronicles are demo accounts,with all of the inherent problems therein, which are used within this blog in an attempt to track the results of my own thought processes., and is run as a model. Traders who should make their own decisions based off their own research, due diligence, and tolerance for risk. Any pictures used within this blog are believed to be public domain. Any charts that are displayed using the ThinkorSwim platform, and other pictures were obtained through Wikipedia's public domain policy. As a reminder, any trades discussed for "Airelon's Challenge Chronicles" would only be 'day trades' according to the parameters discussed for Airelon's Challenge Chronicles, at this stage of the game in order to escape the risk of over-leveraged gap opens in the commodity futures markets. As a 'trading sister' would have grown to the $30,000 level, I would have graduated the account into 'swing trading'. In addition, it is understood that readers have read my YouTube methodology series. It is also understood that the writer of this blog has repeatedly warned against the dangers of shadowing any other traders thoughts. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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