January 6


Enter Your Trade Knowing When Price Is About To Explode

By Julia Ellinghausen

January 6, 2021

It came out of nowhere. The devastation was immediate and only going to get worse. The ultra-deepwater drilling rig, otherwise known as Deepwater Horizon, was running well… until April 20th 2010 – when it wasn’t.

Eleven crewmen died instantly and the fireball the explosion created could be seen from 40 miles away. When price decides to explode, the last place you want to be is sitting on a trade that’s on the wrong side. These are the moments that leave scars your account may never forget – assuming it survives.

Fortunately, you can keep an eye on conditions with the Money Flow Index. This reliable tool gives you accurate entry and exit indications by reading the very oil that runs through the market’s veins – money.

Price explosions that send accounts to the ocean floor

Things went haywire at 9:45 on April 20th in 2010. It was the final stages of drilling when a geyser shot up from the marine riser and onto the rig – shooting up 240 feet into the air. What followed is referred to as an ‘eruption of a slushy combination of drilling mud, methane gas and water.’ Forget the chemistry – it was a total firestorm.

Every minute there’s a slushy, methane-like explosion in a market that has traders jumping and ducking for cover. These are the moments when news hits, or volume spikes and price loses its mind – even if it’s just for a moment. Traders are often burned badly with losses during all stages of the explosion. Those who try to trade in advance – get burned by being wrong. Those who trade during the explosion are blown up by the volatility. And those who trade late are left wondering what just happened because they enter after all the money has been handed out.

In many instances, this happens because they simply don’t know where price is at relative to overbought or oversold extremes. Fortunately, there is a series of warning oscillators that can help you avoid the flames and profit from the power. You can start with the one thing traders care about – money flow – using the Money Flow Index.

An indication you need to watch when price blows

The crew did everything they could, including activating the blowout preventer – but it failed. As it turns out, in that situation the final defense to prevent an oil spill is a device known as a blind shear ram. It’s designed to literally shear off the drill while simultaneously sealing the hole shut. That failed as well. At that point you run for cover.

Not the case when you have an explosion in your market and you have MFI on your chart. When price has blasted through Keltner, Bollinger and any other band you have set up – take a look at where you’re at relative to the MFI. It’s simple to read and will tell you if you’re coming up on an opportunity – or if it’s time to duck and cover.

This oscillator uses price and volume to measure buying and selling pressure. Also known as a volume-weighted RSI (Relative Strength Index) – it moves between zero and 100. You’re watching the extremes – over 70 at the top will tell you if you’re in overbought extremes. Below 30 at the bottom will tell you if you’re in oversold conditions. If you really want confirmation that you’re dealing with a blowout – push the 70 up to 80 at the top and the 30 down to 20 at the bottom.

As you compare this to price performance on your chart – you’ll be able to see the swings that you should be trading for reversals. You’ll also see the ones that you should be ignoring.

Entering in safe conditions while avoiding the flames

The lawsuits, settlements and damages resulting from the Deepwater Horizon explosion would take years to sort out. BP would end up footing the bill for the clean-up and settling up with the survivors and the families of the victims to the tune of around $20 billion. Despite all the money floating around in the aftermath – it’s hard to imagine that anyone came out ahead.

Spot the differences between market chop and real swing explosions with MFI!

When a market explodes, you can take your just profit simply by keeping an eye on the MFI extremes. Patience in this case is the watchword of your trading day. Anything in between is the market chop that you want to avoid. When price does approach an overbought extreme – over 70 – you can plot a reversal back into the primary trading zone. Same for any breaches below 30 when price reaches really cheap oversold conditions.

Using the ES chart here as an example – note the relationships between extremes with the MFI and tradable swing moments that you can take advantage of. Beyond that, take a look at the big swing that takes place right around 10. See how MFI pegs out over 80 and then comes back down under 20 at the bottom?

Even though price was exploding (down in this case) trading anywhere in the middle of the MFI range would have gotten you burned. Better to wait and take your entries and exits at the extremes.

The value of volume when fighting price

True, many oscillators fail with alarming frequency. In fact, those who fail to factor the volume that drives price movement may miss more often than your account can handle. Not the case with MFI, it factors volume and as a result has an excellent degree of accuracy. It’s this insight that will keep you from getting run over (or blown up) when price goes on a run – or takes a pause that isn’t really a reversal – and keeps trucking.

These are the moments that many oscillators fall for, providing an inaccurate signal or condition that retail traders blindly enter on. Using MFI in conjunction with Bollinger or Keltner will give you an additional layer of safety to double check your conditions.

Take your profits with ease while others pick up the pieces

It took a full two days before the fire finally died down on the rig, and then it sunk into the ocean. The remains of the rig were found about 5,000 feet below on the seafloor. They wouldn’t cap the gushing hole spewing oil for almost another three months. The damages were almost incalculable.

Don’t get burned by a price gusher. Profit instead by adding MFI to your chart. Keep an eye on the extremes and wait for your opportunities at the edges – 70 for overbought or 30 for oversold. If you can manage to wait for optimal swing conditions, sit tight for 80 at the top and 20 at the bottom.

Take your entry and ride your exit through to the center. If price is on the run, but at the center of the index – steer clear. You have a gusher and need to steer clear or you’re going to get burned.

Profit by keeping a tight grip on what’s happening with money flow while other accounts head to their final resting place on the seafloor.

Julia Ellinghausen

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