Trading What I See

Street Smarts: High Probability Short-Term Trading Strategies

This is a book full of short-term trading setups, and I think it should be in every trader’s library. Linda Raschke usually gets all the credit for this book, but Larry Connors was the co-author, and they take turns explaining some of their best short term trading techniques.

You’ve probably heard of Linda’s Holy Grail setup, and this is the book that made it famous. It is one of the most well-known (but not necessarlly well-traded) short term methods for playing pullbacks in very strong trends. Like all good trading setups, Linda gives you the exact settings for entry and exit, while using the Average Directional Movement indicator (ADX) to define the trend.

Like many of the strategies in the book, the Holy Grail (and most of the others) works on almost any market and in any time frame, whether you are a day trader or only look at charts on a weekly basis. The 25 chapters have over a dozen devoted to single techniques, with several that cover trade management and general market indicators. And as Linda points out in the introduction:

All you need is one pattern to make a living! Learn first to specialize in doing one thing well. We know two traders who do nothing but trade the “anti” pattern from a five-minute S&P chart.

That resonates with me, because one of my main entry techniques almost always triggers at the same time as an Anti pattern. The Anti is one way of defining a trend, and then trading pullbacks against it. The Holy Grail is a slightly longer term method of doing the same thing.

But a good trading toolkit will have more than just pullback patterns. Turtle Soup attempts to catch trend changes just as they happen. Momentum Pinball looks at the changes in direction in the three day market patterns identified in the Taylor Trading Technique. And Historical Volatility Meets Toby Crabel show one way to take advantage of the NR7 narrow range days.

Originally aimed at Swing traders, there are a number of the techniques that I use in my intraday trading from a three minute chart. Besides my version of the Anti, I’m constantly looking for Three Little Indians showing an exhaustion pattern with three symmetrical peaks. Or an 80-20 pattern that occurs at pivots.

And this is where I first ran across the Wolfe Wave pattern which, although I don’t trade it the way Bill Wolfe teaches, sometimes provides the overall structure giving definition to my own trades.

No matter what your trading style this is a book worth reading. You’ll probably find that you keep going back to it until certain sections become second nature, giving you a both a trading edge and a better understanding of the markets.

Although I’ve never actually traded a Wolfe Wave, I easily recognize them after the fact. But today I called this one right at the top. (Called it, but didn’t trade this one either.) The numbers on the chart are not Elliott waves, but the tracks of the Wolfe.
I first ran across this pattern in the Linda Raschke/Larry Connors book Street Smarts, but for more details check out Bill Wolfe’s web site. There are a lot of definitions of a “Wolfe” wave on the web, and mine is my own interpretation, but when they work they are impressive.

Look for three waves in one direction where point 4 pulls back into the area of the first wave. As in this example, the 5th point often overshoots a bit, so the entry is when price comes back down through the trendline. The key is the target, found with another trendline from point 1 through the bottom at point 4. Expect a reversal when price gets there.

In today’s market not only did we hit target, but a Stochastic DIVERGENCE gave the signal for another entry. Do Wolfe Waves always work this well? Does the market hand out free money? But I think I’ll spend this evening building a better Wolfe trap.