How to keep your trades in harmony
By Tom Hougaard.
The definition of harmony is a pleasing combination of elements in a whole. My mentor Bryce Gilmore taught me harmony in the markets. There was no course book, and no papers to read. It was night after night going over the day’s charts, pointing out the harmony in the day’s price action. Let me give you a concrete example.
The DAX pushes up 50 points after the news announcement on the war against Libya. It retraces briefly, only by about 18 points, before surging higher. I make a note of the number of points it has retraced. The next time it retraces from a momentum move higher, I am ready to buy it, once the retracement has reached 18 points. Why? No other reason than I have seen it happen thousands and thousands of times on the practice charts.
For a good example of how practice makes perfect take 23 March 2011. The eurosterling cross rate was retracing from a surge higher. The daily trend, the four-hour trend, the hourly trend and even the 15-minute trend were pointing up. The first retracement lasted about two hours, and was 40 points in extent. After a rally for 30 minutes, it began to trade lower again.
I made a note that the high of the brief rally was £0.8744. I plotted that, should the cross come to £0.8704, which was 40 points from the high, I would be a buyer. The trend was, after all, still up. All good things come to those who wait. Eventually, £0.8704 printed and I bought, with the smallest of stops of no more than 15 pips. What made £0.8704 so powerful was that it was also a 61.8 per cent retracement of the last swing. I may be getting ahead of myself here, but when two or more ‘tools’ come together at the same price level, it is called confluence. We will discuss that in a later chapter.
Once I am in a trade, I have one primary objective: get my stop to breakeven as soon as I can. In this example I had the pleasure of being able to buy euro-sterling twice at £0.8704, both times making 10-15 points.
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