I love long legs

Oldtimes1984mgorowski

It’s been a while that I’ve wanted to talk about legs – the longer they are, the more I like them…

A simple definition of a leg would be that it is a sequence of bars starting in a significant low (high) up (down) to a relevant high (low).

I wanted to show you the gold GC0604 daily chart, because of the price gap it made today to $567.40 on the shocking news that Mr. Wang Yuanlong, a director of the Chinese PBoC Australian operations, stated that the PBoC should allocate more gold in its $800 billion reserves…

Lucky longs!

BTW, it would seem that the Chinese are reacting to the US Senate proposed bills to compensate for the Yuan/USD exchange disparity. I think the message reads loud and clear: do not bite the hand that feeds you!

Leghooksgc0604

Getting back to the subject at hand, and looking at the chart, we see a leg which started in A and ended in F. In this leg it’s important to underscore the hook shaped highest highs (B and D) or lowest lows (A, C and E) that conform this leg – they are important resistance and support levels.

As long as these high hooks are taken, the advance will continue unabated and the leg will become longer. Otherwise, if a resistance is not taken, as in D; or a support does not hold, as is the case in E, the advance has been stalled. Also note how Y and Z previous highest high hooks were taken out to allow the leg to commence its development.

So, we might set the next simple trading method, which is the cornerstone of  Joe Ross’s trading technique:

  • To enter a long trade, place a buy stop order a little above the
    high of the last hook; resistance has been broken.
  • Or, to enter a short trade, place a sell stop order a little below the
    low of the last hook; support has been broken.
  • A good place for a stop – after entering a long trade – is a sell stop order a little below the low of the last hook; support has failed.
  • A good place for a stop – after entering a short trade – is a buy stop order a little above the high of the last hook; resistance has failed.

Legmasgc0604

EMA(5), EMA(13) and EMA(20) should further help us to gauge the strength of the advance (decline). Notice how the red EMA(13) line would’ve improved our stop in regards to a plain hook; and, how the EMA(5) blue line would have either helped us to bail out sooner for a faster trade or as the canary in the mine warning…

You can also aid your decision on what I would call a modified Fibonacci. If the retracement is less than 40%, I feel the advance (decline) is still healthy, I hold; but, if the retracement is 50% or greater, I bail out.

There are more indicators to help us evaluate the health of a trend; but, I’ve listed them in descending importance. I’ll leave for you guys to evaluate the CCI index and others which do have their significance in day trading.

Happy trading!