| Short Skirt trades are scalp trades
made off small continuation patterns in swinging or trending
markets. The phrase was originally coined to describe the trades
taken off bull and bear flags on a 1 -minute S&P chart, but the
concept works on any time frame, any market. Short Skirts are
retracement patterns that follow a sharp impulse down. Remember
that momentum precedes price. "Impulse" signals more "impulse",
and this is what creates a trend. After an impulse move, there
are very high odds of either a retest or another leg in the
direction of the impulse. The average profit when trading "short
skirts" off a 1-minute time frame tends to be between 1-3 S&P
points. The best way to place the stop is to risk 3 points from
the initial entry price. The market rarely retraces 3 more
points beyond your entry level without first going back down for
a retest. In extremely volatile markets, it is suggested that a
5-point initial stop be used. As the trade starts to work in
your favor, pull the stop down. Active trade management is an
important trading skill. By trading on a small time frame, much
tighter risk parameters can be used, which allows one to trade
with more leverage. The idea is to get into the market and grab
as much spread as possible in the least amount of time. It is
the ultimate game in scalping. There are several ways to enter
these continuation patterns. One way is to look for a
retracement back to the 20-period EMA. Another way is to watch
the price action for when it starts to stall out on the
reaction. The last way is to eyeball the retracement pattern
that is forming and use discretion. Sometimes the best trades
are those that make flat ledges and do not give
much
bounce at all. "Short Skirt" trading works best in heavy volume
markets, broad swinging markets, and trend days. This style of
trading does not work as well on the day following a large trend
day or buying/selling climax. This is because consolidation days
have little follow through, and the Short Skirt trades count on
follow through to reach the profit objective. It also works best
when there is good liquidity. Slippage in noisy markets can eat
a trader alive! Trades are taken in the direction of the trend.
Thus, most losing trades tend to come at the end of the trend!
There are 2 distinct patterns that most often signal the end of
the trend. By being aware of these two patterns, losses can be
reduced.
Patterns By Which To Filter Losing Trades:
The first is the '72" setup. This is actually such a nice
trade it can be taken in the opposite direction. It is in part a
simple divergence between the price and a smooth moving average
oscillator. The easiest oscillator to use is one derived from
the difference between a 5 and 35-period exponential moving
average. (The 3/10 oscillator is too sensitive to use on a
1-minute SP chart). Second, do not look to take a "short skirt"
trade after a buying or selling climax. A selling climax can be
recognized by an extreme tick and tiki reading .... such as -800
ticks and -24 tikis. The market can also make a sharp N" type
reversal after a selling climax. The end of a trend can also be
more readily identified when looking at a higher time frame. For
example, if there is a corrective downtrend on a 5minute chart,
but the 30-minute chart is still in an uptrend, the downtrend on
the 5- minute chart is most likely to find support at the
30-period EMA. It helps to look at multiple time frames. If the
market retraces deeper than the 30-minute EMA, the next level to
look for support would be the hourly EMA. The "Short Skirt"
trading works best when watching 2 time frames side by side. For
scalping, use a 1 and a 3-minute chart. The same principles
should be used when looking for flag formations on other
markets. For example, when trading bonds, perhaps a trader would
want to use a 15 and a 60-minute chart. This is the best way to
eliminate false signals on the shorter time frame. Lastly, it is
always important to examine the expected market volatility
environment. The market tends to alternate between a trending
and a non- trending environment. After a buying or selling
climax, look for a trading range to begin. When the market is
narrow or there is a large opening gap, expect a trend day.
Short skirt trading cleans up in a good trend leg up or down.
TICKS
Ticks indicate how much buying/selling power is stored up. If
there is a large "uptick" reading, a majority of stocks are
being bought on balance. Ticks must be watched with respect for
the overall tone of the market. They are can be used in a
countertrend manner by looking to fade the extreme readings when
in a trading range. They can also be used in trending markets to
enter on retracements in the direction of the trend. For
example, if the market is in a steady uptrend and there has been
a burst of buying activity which drives the plus ticks to +600,
watch for the ticks to retrace back towards zero as a buying
opportunity. In a normal sideways trading environment, +500 and
-500 tend to be overbought/oversold levels. Ticks trade in an
approximate 1200 tick range, so if the market has been in a
down- trending environment, and the tick readings fluctuate
around -1000, then +200 will be "overbought" or represent the
upper end of the range.
Ticks should be watched in conjunction with the "Tiki's", (or "Ticki's"
on some data feeds). This reading is the net number of Dow
stocks on an up-tick or downtick. In general,
overbought/oversold range is +24 to -24. If the Tick reading is
+500 but the Tiki's only register +12, there will probably be
another surge up. The implication is that the trading programs
have not fully kicked in yet. The programs almost always cause
the Tiki's to reach +/ 22 to 26. Ticks also function as a
confirmation/non-confirmation indicator. If the market makes a
new high, the ticks should make a new high. When this occurs,
retracements can be traded in the direction of the trend.
However, if the price makes a new high and the ticks do not, a
reversal is likely. Always remember, in a strongly trending
environment, ticks and momentum based indicators or oscillators,
will have a tendency to give premature false readings, so be
sure and assess the
degree of trend in the market before using these indicators.
Since the market alternates between a trending and a
consolidation mode, the day following a trend day or wide range
day tends to be a particularly good one for using the ticks in a
countertrend mode. Ticks can also be used to confirm the opening
in the S&Ps. If the S&Ps have a large opening gap up, and the
ticks have a high reading, thus confirming the move, there
should be continuation in the direction of the gap. If Ticks
reach an
extreme reading one day, it indicates a trend day. There are
good odds for a bit more follow-through the next morning on a
day where the ticks hit +/- 1000 in the afternoon. Once again,
the following day should see a lesser reading in the tick
extremes before the trend turns.
DOG DIDN'T BARK
Ticks can be used to confirm the price action. A strong up
move should be accompanied by healthy uptick readings. At market
tops, there is a tendency for the market to get dull and
complacent. The market rallies but the tick readings are barely
positive. This pattern is called "The Dog Didn't Bark". It is a
sign of weakness and means the market is ready to rollover.
The same principle can be used on opening gaps. For example, if
the market has a large opening gap up, but the ticks only
register between 100 and 300, this represents "non-confirmation"
and is another case of "The Dog Didn't Bark". The market should
sell off.
THE SHIP AIN'T SINKING
Just as there are distinct patterns such as a lack of tick
reading at tops when the price action starts to roll over, there
are also patterns that show support coming in at bottoms. When
there is a series of heavy downtick readings, but the price
starts to hold, it is called "the ship isn't sinking". The
market is throwing a barrage of oversold tick readings at the
market but it refuses to fall apart. Tick readings worse than
-500 must be seen over an hour long period while price holds. A
rally of a couple hours duration should then materialize.
'Z' DAYS
"Z" days are consolidation days that can be aggressively
scalped off intraday swing highs and lows. The market starts to
form a trading range and key pivot points should start to
contain the price movement. These are also days where overbought
and oversold tick and tiki readings can be aggressively scalped.
The market makes many intraday tests, as it begins to
consolidate. On consolidation days, a penetration of the first
hour's high or low will be a false breakout and a trader should
look for signs to fade the breakout. Keep in mind, the
penetration of the first hour's high or low can still run a few
points over a half hour time period, so wait for a sign of small
buying or selling excess, or an exhaustion point. If the market
is consolidating following a strong up-thrust, the first deep
pullback in the ticks sets up a good buying opportunity. As
long as there are strong uptick
readings, it indicates a strong trend. Wait for the period when
the "Dog Doesn't Bark" or the ticks show a lack of up readings,
before looking to go short. It will be a better short trade if
the high is exceeded on a lack of plus tick readings and the
market then rolls over, rather than trying to short a buying
climax.
TICKI
Tiki's are the number of net Dow Jones Industrial stocks that
are on an uptick or downtick. In a sideways (trading range) or
light to moderate volume day, look to enter a short or exit a
long when the Reading is greater than 24. Look to buy or exit a
short when the reading is greater than -24.
S&P - PREVIOUS DAY'S HIGH AND LOW
The previous day's high and low are two of the most important
pivots to watch. The market tests these levels many times and
often they become key support and resistance levels. If a trader
used no other indicators, he would still be able to make a
living just by watching the play around these points. The first
"play" of the morning should be to move towards one of these
levels. If the market close in the lower end of its range,
expect it to test the low and vice versa. If the market
penetrates one of these levels and does so on good volume, it
will often retrace back to this level before starting another
leg down. Old support becomes resistance and so forth. Key swing
highs and lows are the most visible chart points and serve as
magnets for the price action.
GLOBEX
The Globex high and low can be watched as
key support or resistance in the same manner as the previous
day's high and low. It is very rare that the Globex range is not
traded into during the next day's session. In other words, if
the next day's open gaps outside the Globex range, it is likely
that a move will be made to test back into this range. The first
thing to note is whether there is buying or selling pressure on
Globex early in the morning. More often than not, this pressure
will assert itself after the day session's open. If Globex is
trading 3 points higher than the previous day's close and then
the day session opens 5 points higher, this tends to be a sign
of strength. Conversely, if Globex is trading 3 points higher
than the previous day's close but the SPs open flat, this tends
to be a sign of weakness. Usually, there will still be a small
move to test where the Globex session closed. |