In the interview, Suri has a nice discussion about the Trader Vic 2B and ABC or three-wave patterns. The ABC pattern is probably the one that I pay attention to the most, but should also pay more attention to the 2B type of setup, which is similar to the 1039 ET $TICK / Price divergence that we saw yesterday.
The first 30 minutes of open market activity can be an extremely profitable or unprofitable time of day to trade. It has not been my best time of the day to trade. It is a time of day when proper money management is truly important, since the market has a tendency from time to time to turn on a dime during this emotional and volatile period.
Yesterday, the market was bullish during this period due to Lehman news and the upcoming Bernanke speech. As the market bounced off the 38 Period EMA on the 630 tick chart, a good trade setup would have been an entry at 1284.5 with a stop at 1282.75, which was a risk of less than 2 points. The potential reward was close to 10 points, which could have been based on the up surge from 1277 to 1288 with a 50% correction to 1282.75. An example of assessing potential reward to risk.
Even though you should not rely much on the $TICK in the first 15 to 30 minutes, it did confirm the bullish attitude of the market in the first 30 minutes to help develop confidence in the trade.
In the case of yesterday morning's Price / $TICK divergence trade, you are not sure what the potential reward might be. The risk is the high. What can be done here is to trade in multiples of three contracts. Phase out 2 contracts as the market goes in your direction for two points, and keep the third contract for possible large moves with a breakeven stop for the third contract.
Charles
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