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Dummy Trading Using Daily Charts: Metalico (MEA) at Trader’s Narrative





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I find the fractal nature of financial markets fascinating. You can look at a minute chart, a 30 minute chart, a daily chart, a weekly chart and you will see basically the same formations, the same elemental forces of support and resistance and the same setups.

As a trader, you can use this to your advantage. Switching time frames can help you avoid a “noisy” market. It’s also a great trick to avoid looking at the same charts that everyone else is looking at. It can, in fact, be an edge if everyone is looking at the 15 minute chart, for example, and you’re looking at the hourly chart or the 40 minute chart. You will see things that others will simply miss.

To illustrate what I mean, let me show you an example of a trade executed following the basic rules of the dummy trading setup: look for a thrust (expansion in price), then a contraction or pullback and hop on as the contraction is taken out by the continuation of the trend. The dummy trading setup is meant to be executed intraday but knowing the fractal nature of the markets, there is no reason we can’t trade it at a higher time level. This example is a swing trade using daily charts.

Metalico Inc. (MEA) is in the hot metals sub-sector. It put in a stable, long base for over 4 months. Then in early April it broke out with unusually high volume. It consolidated a little around the $5.25 breakout area and continued higher. If you missed this first opportunity, the next one came on April 18th 2007 as price pulled back significantly. It formed a hammer like candlestick with a very long tail. This was a tell that price was being supported as a second wave of buyers saw their chance to get in on price levels they had missed before.

Metalico Inc MEA April 24 2007.png

The next day there was a contraction as it printed a narrow range, inside candle. This is what a “dummy trader” looks for! The break-out of this contraction (green line) then took price to the previous swing high and beyond. Notice also that the volume shrank significantly as price pulled back in mid April. This was another tell that people really weren’t interested to part with their shares but rather to accumulate more (blue rounded box).

How you trade this setup is really up to you. You can wait for a tightening of the price range or you can wait for a real pullback. Traders like Tony Oz only get in on a deep pullback, preferably all the way back to the break out price. But as you can see with Metalico’s example, you may not get such a deep pullback when faced with a strong trending stock.

I don’t think anyone can say one entry setup is better than the other. Ultimately it is up to each trader to fine tune the setup to their liking and temperment. But keep in mind that such setups are merely starting places. Take them and build on them with your own ideas.

In any case, getting back to the point about different time frames… take a look at M&F Worldwide Corp. (MFW) on a weekly chart. Yes, weekly. And then count how many “dummy spots” you notice!

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5 Responses to “Dummy Trading Using Daily Charts: Metalico (MEA)”  

  1. 1 reno

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    Great post! I like the explanation of the dummy trade — I keep on seeing that term in all the blogs and had been trying to figure out what pattern to look for and what that meant.

  2. 2 Babak

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    thanks Reno, if you want to learn about dummy trading, there’s only one source: Maoxian

  3. 3 reno

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    I did the MFW assignment and came up with the following for when to trade these dummy setups. Let me know if they’re right. Thanks!

    narrow range inside candles aka dummy trade

    1/1 - buy when it clears 26.25
    1/22 - buy when it clears 31.73
    3/12 - buy when it clears 39.31

    I love that the dummy trade can be applied to a short term trading. I can’t daytrade since I have a day job and this can certainly help me with my swing-trading entries. Thanks again!

  4. 4 Babak

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    reno,
    the first two are correct ‘dummy spots’ but the third is actually 3/5 at the break of $37.91 high . This one probably threw you because it wasn’t an inside candle or a contraction but rather a pullback.

    check with Maoxian to get a better grasp of dummy trading. It is quite simple and you’re 90% there :) But keep in mind that this is just a setup and there are still many, many other elements to becoming a successful trader.

    Cheers

  5. 5 reno

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    Thanks for the answers and response Babak! I will indeed also go through Maoxian’s stuff about dummy trading.

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