Once again I spent the day working on this website and did not trade.  In reviewing the day’s price action, I thought it would be appropriate to discuss the concepts of intraday SRs and consolidation areas.

As a day unfolds, sometimes new SR areas form on a price chart. 


I usually adjust SR lines or add new ones to better reflect the current intraday market.  These SR lines will carry forward to days in the future as long as price continues to respect them. 

Often times, a market will consolidate intraday.  When a market consolidates, it trades between an identifiable range.  A consolidation area is a long pause in price movement, so long that it creates it’s own SRs.  The top of the range is resistance and the bottom of the range is support.  I usually draw trend lines connecting the price tops and bottoms to represent the consolidation area SRs.  Price can break in either direction from a consolidation area.  When price breaks, it usually breaks fast in one direction or another.  Be careful however because markets love to do fake breakouts. 

Here’s an analysis of potential YM trades for 9/26/07:

09/26/07 YM Nickajack SR System trades

Trade 1 – You cannot tell from the chart snapshot, but the current market trend is up so I’m initially looking for a long trade.  After the YM opens, it begins to pause around the 13921 daily SR.  There is finally a move up that breaks the high of the previous bar on the 9:55am candle which triggers the following trade:

 B 13920  X 13908  T1 13962  T2 13998

For two contracts, the risk is 24 points.  Target 1 potential is 42 points and target 2 is 68 points.  So where did target 2 come from since it’s above the all time high for the YM Dec 07 contract?  Well whenever a target is beyond the known daily SRs, we have two choices for choosing a target; either use a Fibonacci extension based on the current swing or target a big round number.  Since 14000 was sitting less than 40 points above the contract high, I would have initially targeted a price just inside 14000 (i.e. 13998).

Trade 1 never reaches the first target.  It spends an hour in one consolidation area and then two hours in a second consolidation area.  These type of days really try the patience.  It’s hard to make money when the market has little follow through.  Based on how the lows of the consolidation area are sloping up, I would have predicted a break to the long side.  Because of the long amount of time involved in this trade, I would have started squeezing a trailing stop and would have probably exited somewhere around 13940 which would have netted 40 points for the trade (i.e. 2 x 20).

Trade 4 – This trade looked like a setup for a short trade.  A lower low was in and a lower high was forming around 2:20pm.  A trade was triggered in the 2:25 bar:

S 13919  X 13929  T1 13902  T2 13875

The risk is 20 points (2 x 10) and the targets are 17 points and 44 points.  Why did I use 13902 for target 1?  It’s one point inside intraday support formed by the current low of the day.  The market quickly reversed and hit the stop for a loss of 20 points.

Trade 5 – Psycholocially this would of been a tough trade to take.  The day has been tough, waiting hours through trade consolidations just to have a losing trade.  Unfortunately, it always seems like when you give up for the day, a good trade happens. 

Price just put in a potential higher low signaling a potential trend change.  An up trend would not be in place until the previous swing high 13931 is taken out.  Thus to hopefully avoid being wipsawed in another consolidation area forming, the safe trade entry would have to be above 13931 swing high which happened on the 2:55pm bar.  The trade would have been:

B 13932  X 13917  T1 13962  T2 13998

The stop is set one tick below the low of the previous bar.  The safer placement would have been 13910 below the swing low, but 44 points is too much risk for me.  A 30 point risk (2 x 15) is not ideal, but reasonable since a new swing high was to be made to confirm the up trend and hopefully get out of the consolidation area.  This trade would have the same targets as specified in Trade 1.  It’s amazing how once the contract high was broken,  price was drawn to the big number of 14000, stoping just one tick short.  This could have been a fantastic trade grossing 96 YM points.

Non-Trades 2 & 3 – The consolidation areas marked with 2 and 3 represent potential consolidation SR breakout trades.  These are not defined as part of this system, but I personally would have taken them.

Wrap-Up 

Today the system would have netted less than 20 points after commissions without Trade 5.  Personally, I don’t think I would have had the endurance to take Trade 5.  After waiting through consolidations all day and taking the stop at Trade 4, I probably would have stopped trading.  That’s just a nature of trading.