Trading Price Shakeouts in Futures, by Gabriel Grammatidis

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For a good part of every year, I stay in Greece where I have a home close to the water. I share a speedboat with a friend of mine, and I really love to drive it. It is fun and at some point in its acceleration process, the boat becomes very stable and glides nicely above the waves.

Speedboats also allow you to change direction in an instant with only a slight turn of the steering wheel. This typically provides a good surprise for friends on board. In order for everyone to enjoy the ride, you want a trustworthy driver, or better, you want to be the captain who is in full control driving the boat. Otherwise you risk being the guy who, as he sits on the slippery deck, falls into cold waters on a sharp turn.

Have you every been “thrown off the boat” by a sharp turn in the market? Trading Futures can be a very frustrating and emotionally painful experience if you are unprepared and not in control, that is if you are not the captain of your trading. Over and over again in Futures markets, traders experience the famous V-Shape Price Shakeout. This powerful Market Trap typically blows traders out of the market at the low. Just like the startled rider in the cold water watching the boat head off, startled traders watch prices shoot sharply in the opposite direction — only this time without them on board to enjoy and benefit from the ride.

Does this sound familiar? It certainly does to me! During my early years as a trader, I was “in the water” watching price drive off without me countless times. But arguing with the market about how unfair it is did not help me move forward. It only drained my trading account and my physical energy levels.

In technical terms, this kind of price action on the charts is called a false break, a failed break, or a breakout failure. It represents an emotional battle between buyers and sellers at crucial decision points. Within the right charting context, these battles represent important turning points in price direction.

Did you know that professionals created the Futures market to lure less seasoned traders into these expensive and painful V-shape market traps? Unfortunately, most traders never learn the lesson and continue to get trapped over and over again — consistently losing money to the professionals.

Welcome to the Game of Futures Trading. The good news is that you can create your own version of the game, a version where you win. How? First by understanding the crucial turning points in the Futures charts and then by having a set of rules to help you profit consistently from those price moves.

Futures Market Characteristics

The Futures market is very famous for these price shakeouts. If you know how to identify them and use them to your favor, then you can have fun being the captain of your trading. Hunting for other peoples’ stops in these big moves is always much more entertaining and profitable than watching your stops get run over at critical decision points.

I absolutely love to spot these “turning points” that are so typical for Futures. I trade (and teach) three Futures systems which capitalize on these recurring emotional situations in the market. You can learn to detect specific visual patterns that indicate psychological traps and that provide great low-risk trades. Initially, it is not easy to spot these footprints on the chart as they are counter-intuitive. Nearly all beginner traders fall into these traps, but with some guidance, you can benefit from them — greatly. These patterns can be a source of very consistent trading profits for people who trade them.

Trading a big and volatile bar sounds counter-intuitive to many but this is part of the reason why it works! Typically, inexperienced traders shy away from big volatile bars. Provided within the right charting context, however, these kinds of bars represent a great opportunity if they fit within the overall set of rules. A big bar should really be evaluated in relation to the overall trade frame within the chart: a bar might be identified as “big” in comparison to the bars that form the prior consolidation but in the overall context, it can still be seen as “small” compared to the distance of the price target. The market trap occurs quickly and creates a lot of pain and this can be seen on the chart as the “footprint“.

The Test Bar Marks the End of the Emotional War

All three of my systems for trading Futures are based on the idea of the Test Bar or “the Hook” — a big bar which identifies an excitable price action event. The hook often represents the starting point for an extended follow-through in trend direction. While the risk to the downside is limited and the initial stop is very well protected, the profit potential on the upside is significant. I basically look for consecutive bars of increased volatility which is a clear sign of the emotional war being in full motion. The Test Bar marks the end of the battle and the completion of the price shakeout. Understanding the Test Bar is critical! You should never enter before or during an emotional battle but instead sit relaxed in front of your screen waiting for the Hook.

Once you see the Test Bar, you have proof that the conflict is over and the trap has closed. This is the moment of “stillness” that can often be experienced when looking at the charts — it is as if both war parties are exhausted and need to recover for a short while. Trading in overall trend direction, the trend traders need to come up first and show a proof of strength – now you can set a price target and enter — prepared to run the stops of the trapped traders to your benefit. As a double trap, false breaks leave counter-trend traders stuck in a bad trade while many longer-term trend traders are trapped out of a good trade.

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This pattern shows a low-risk idea based on big and volatile bars. The Test Bar marks the end of the emotional move and allows for placing a very well-protected stop. With bull strength coming in, entry occurs when the market trap closes. This completes the V-Shape Shakeout. Source: Gecko (System 1) —

In some cases, these day-trades can be transitioned into a Swing trade and for those trends that develop really well, you can build a Pyramid of several trade positions. These trades offer a high reward-to-risk potential and Big R-multiples of +10R are not uncommon. The systems, however, do not rely on those exceptionally high R multiple trades, instead, they have a strong positive expectancy with a good number of +2R and +3R trade results.

Clear and Precise Rules, Trading to Enjoy

The Futures systems I trade are rule-based discretionary in nature. They offer precise price levels for entry, initial stop and exits. Because the rules are clear, some former students have automated parts of the system in order to free them to scan for additional trade opportunities. Discretion comes into play mainly for evaluating the quality of a trade pattern and analyzing the overall charting context within the multiple-timeframe setup. In the end, you want to focus on the higher quality trades as they produce the best results.

I truly enjoy trading Futures for its speedboat-type of market characteristic and for all of the flexibility it offers. Wherever I am and at whatever time of the day I scan, I can almost always find long or short trade opportunities in multiple asset classes and in multiple timeframes. Trading Futures allows you to effectively fine-tune your own version of the Trading Game to your specific situation. For more about these benefits of trading Futures, see Top 10 Reasons to trade Futures.

Once you know how to exploit the V-Shape Shakeout to your benefit, then trading Futures becomes much easier — a relaxed, fun and gratifying activity — very similar to gliding your speedboat above the waves! So, be the Captain of your trading and enjoy your speedboat ride.

Note from Gabriel — Part of my personal mission is to help others, provide information, and transfer knowledge so that your path of trader development becomes as smooth as possible. As more experienced traders will tell you, everybody needs to transition through certain learning stages and I enjoy helping new and experienced traders make those transitions. With every workshop, I too am learning from you in how to better coach you. I like to stay in touch with attendees once the workshop is over and I offer various degrees of mentoring support after each event.



Gabriel Explains The Significance Of Big And Volatile Bars
In this 5 minute video, Gabriel explains how two systems found entries in Natural Gas (NG) last month and allowed him to build a pyramid position. After an initial consolidation, big and volatile bars represented an entry signal for Gecko system (S1). Many traders try to avoid these kind of conditions but this pattern developed within a larger context and enabled Gabriel to enter a trade with low risk. After a rapid “speed boat” move up, price then consolidated again but this time, no big, volatile bars followed. For these kind of conditions, the Turtle (S2) system found another entry. In the end, the pyramid of positions profited with a big R trade result.

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