Three Usual Suspects

A good friend of mine has lent me one of his classic trading book, the "Street Smarts: High Probability Short-Term Trading Strategies" authored by two widely popular and highly regarded traders of our time Linda Raschke and Larry Connors. Although this book was first published in 1995 it is in my humble opinion  contains wealth of information that are useful and highly effective even in today's market.

On pages 6-8, the book teaches the three distinct trading opportunities that happens over and over again in all liquid and high volume markets and in any time frames. They are:

1. Tests of previous highs/lows. These tests forms a "double stop point" and offer an excellent trade entry.with the least risk of loss. A low test at which to go long can make either a slightly higher or lower low, but support cannot be established until there has been a test!

2. Reaction or Retracement (pullback). This is "buying a higher low" in a sequence of higher lows and higher highs (sells are reversed). In this case there will only be a "single stop point" but since the trade is entered in the direction of the prevailing trend, no test should be required.

3. Climax or Exhaustion Pattern. The most successful climax trades will occur in a high volatility environment and after the market has already reversed. You must see the "climax stop point" already in place before you enter your position! If your entry is correct the market should move favorably almost immediately.

The authors strongly encourage would be traders to learn to ANTICIPATE these three types of plays which overtime will greatly refine one's tape reading skills.