T RADING THE M M EASURED OVE Founded in 1807, John Wiley & Sons is the oldest independent publish- ing company in the United States. With offi ces in North America, Europe, Australia and Asia, Wiley is globally committed to developing and market- ing print and electronic products and services for our customers’ profes- sional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, visit our website at www.WileyFinance.com. T RADING THE M M EASURED OVE A Path to Trading Success in a World of Algos and High-Frequency Trading David M. Halsey Cover image: © iStockPhoto.com/© Teekid Cover design: Paul McCarthy Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. 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Library of Congress Cataloging-in-Publication Data: Halsey, David M., 1977- Trading the measured move : a path to trading success in a world of algos and high frequency trading / David M. Halsey. pages cm. — (Wiley trading series) Includes index. ISBN 978-1-118-25183-6 (cloth); ISBN 978-1-118-28713-2 (ePDF); ISBN 978-1-118-28332-5 (ePub) 1. Investment analysis. 2. Algorithms. 3. Program trading (Securities) 4. Electronic trading of securities. I. Title. HG4529.H356 2014 332.64’20285—dc23 2013029212 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 I would like to dedicate this book to my dad, who taught me that excellence is a habit and that there is no such thing as luck. What others mistake as luck is where preparation meets opportunity. CONTENTS Preface xiii Acknowledgments xvii CHAPTER 1 Today’s Trading Environment 1 Descent of the Pit and Ascent of the Screen 1 Players on the Field 2 vii The Algo Brothers 4 Where Are You? 7 CHAPTER 2 Inside the Hidden Market 9 Deep Roots 9 Fibonacci Basics 11 Fibs Make the Moves 15 Why Do Fibs Work? 19 Fibs in the Real World 21 In Summary 26 CHAPTER 3 Drawing a Road Map 27 Finding Direction 27 A Mountain Range of Price 28 Obstacles in the Road: Pivot Points 32 Navigating Trends 35 Long and Winding Roads 37 CHAPTER 4 More Tools for Trading Power 39 Filling the Toolbox 39 Watching the Clock (and the Calendar) 39 Tick Tock 43 The Tape and the DOM 46 The DOM (Depth of Market) 49 A Full Toolkit 51 CHAPTER 5 The 90 Percent Factor— Executing Your Trade 53 Where the Rubber Meets the Road 53 Priorities and Job One 53 What’s the Risk, What’s the Reward? 55 A Brief Pit Stop 59 Preparing the DOM 60 Crossing the Starting Line 61 Running Off the Road 65 When Multiple Contracts Just Aren’t Possible 66 Why 90 Percent? 68 viii CHAPTER 6 Three Types of Trade Setups 69 S T N The Traditional 50 Percent Measured Move 69 E T The Extension 50 Percent Measured Move 74 N O The 61.8 Percent Failure 78 C Why Is This Important to Your Trading? 82 CHAPTER 7 Using Multiple Time Frames to Trade 83 Time Frames and Russian Dolls 83 The Path of Least Resistance 84 Trading the Trend 85 What Time Frame Should We Look At? 86 Why Is This Important to Your Trading? 91 CHAPTER 8 Three Entry Strategies for Retracements 93 The Goal 93 The Three Entry Strategies 95 The Progression of Entries 101 Why Is This Important to Your Trading? 101