IMPA Setup Trade
STEP 6: ENTERING THE TRADE
At the sixth step of the IMPA trade setup, we are ready to explore how to enter a trade. For this to occur, the core criteria (discussed in Chapters 3 and 4) must be met:
• Trigger selection: Commercials holding an extreme one-sided position
• Public and/or funds holding an extreme (excessive) opposing position
• Proprietary RSI Indicator diverging in the direction of the IMPA selection
• Price structure showing signs and indications that a new trend is beginning
70 COMMITMENTS OF TRADERS
It is rarely in our best interest to buy or sell at the market. Timing is important, and this is what we focus on at this point. First I focus on iden- tifying a logical stop, because without one I cannot determine the proper risk. I only enter the market when the stop and thus the risk is clear.
Once a trend is established, I can go with the market. In addition, I often look to enter at the point where it appears that the old trend is ending and the new trend is beginning. Since I never know for certain exactly when or where this transition will occur, I must always use a protective stop when entering. Although I have discussed stops, it bears repeating here: Unless I have a logical stop, I do not have an entry point. Once a logi- cal stop is provided, I have a valid entry point with a valid risk. This is much better than simply pulling a monetary risk out of the air, so to speak.
However, if the monetary risk provided by the logical stop is not accept- able (exceeding the 10 percent maximum rule). I will not adjust the mone- tary stop to lower the risk; instead, I will simply skip the trade or wait.
Patience is key at this point.
Now, assume that the system is indicating a rising market. Therefore, we would buy on strength. An acceptable entry would be a move above the 18-day moving average for 2 days in a row. If the market has already proven itself (closing above a key area like the 18-day moving average for 2 con- secutive days or more), and we missed the first leg up, there is no need to worry. We simply wait for the market to regress back to the same key area of support, such as the 18-day moving average or even the 10-day moving average, and enter there. It is common for prices to regress back to known neutral points during the early stages of a new trend.
The public, however, tends to chase markets up, buying the highs or selling the lows as a result of the emotional fear of missing that big move.
To stay consistent and avoid emotional mistakes, professional traders fol- low plans and understand the importance of practicing patience as well as consistency. My technique for entry includes specific criteria, price pat- terns, and logical stops. The logical stops are the most important whether I am entering with the market (trend) or I am at a potential turning point. I may buy the market as it is moving to new highs or I may enter on a cor- rection as the market regresses back to a neutral area, but in either case, I always must have a logical stop; otherwise I do not have an entry.
A sell strategy is the same except the orders are to sell. If we miss the first leg down, we simply and methodically wait for the market to regress back to a key area, such as the 18-day moving average.
If you are not ready or able to “pull the trigger” on a trade when the time is right, both bull and bear trends can easily get away. When this hap- pens, wait for the regression back to a key area. Be careful not to chase markets. In addition, remember that markets tend to fall more quickly than they rise, which means a bear market can get away from you faster than a
The IMPA Setup Trade: Placing the Trade 71
bull market. The exception is the commercial bull market, which tends to rise more quickly than noncommercial bull markets.
To recap, here are the key considerations when entering a trade:
Entry considerations: Understand the risk involved before you enter a trade. You do this by identifying the protective stop-loss areas based on the logical stop. The logical stop area may be around a pattern or a price.
To precisely identify these areas, you must look more closely at the data, using charts and graphs. Stops based purely on individual monetary con- siderations are doomed to fail and are not recommended for position trades. Follow the 10 percent maximum rule (see section on Money Man- agement, at the end of this chapter) on every entry consideration.
Measuring the risk: If you are not sure of the risk in a particular mar- ket, you can use equity graphs (discussed earlier in the chapter) to observe the day-to-day fluctuations in dollars per contract. This is what I teach new traders to use to understand what the largest loss or the largest profit in one day might be in any of the 44 markets studied on my web site. In addition, everyone has a threshold of what they can stand to make or lose in one day without it affecting their rationale. As an individual trader, you need to iden- tify that threshold and stay within its boundaries, or you may end up becom- ing too emotional about gains, losses, and trading in general. Controlling gains is just as important as controlling and managing losses. In the begin- ning years, the gains a trader makes often leads to more trouble than losses.
The decision to enter the selection: Trigger analysis relies on the UCL/LCL statistical analysis to select the market(s) with the right condi- tions for a sustained move in one direction. The UCL/LCL graphs identify times when a significant imbalance exists between the two assumed com- mercial entities (producers and consumers). The imbalance in the futures market is either a reflection of supply and demand factors in the cash mar- ket or an early indication of a perceived change in the balance of supply and demand. We also use our IMPA, open interest and spread graphs to study and follow the intermarket relationships and other important factors that can enhance a selection or play an important role in the selection of certain trades such as spread and swings.
The decision to enter—timing: Each market and each setup condi- tion will usually be a little different. Thus, we must approach each poten- tial trade with somewhat of an open mind. Our schematic is simply history and what has occurred when certain conditions have existed in the past.
The timing of an entry is done using daily price charts to identify logical stops, our technical data, equity graphs, and weekly graphs, along with other observations such as the number of days the market has closed up or down in a given number of past days and the day-of-week seasonal pat- terns. Trend analysis, trend reversal analysis, and pattern recognition
72 COMMITMENTS OF TRADERS
analysis are done primarily using daily charts, weekly charts, and equity charts. Seasonal influences (discussed in depth in Chapter 7) can be stud- ied on our seasonal price graphs. Day-of-week patterns can also be identi- fied in the daily technicals and in the history of my daily activity reports, a unique automated report I devised that covers all markets and can be printed daily.