Adrian Manz

First Hour Trading Strategies

Traderinsight.com
Section One

Section 1
Fast Ball
... A straight pitch thrown by the pitcher as hard as possible.

When we started our trading career, breakouts on expanded range were so com-
mon that all a trader had to do was get up in the morning, buy the continuation
move a few pennies above the previous day’s high, wait a few minutes and count
the money. Unfortunately, those days are over, but breakouts will always be part
of trading. The key to capturing profits is in identifying which moves are real, and
which will be added to the seem- ingly endless list of failed patterns. The Fast Ball
pattern identifies the breakouts that have all the ingredients to fuel a substantial
continuation move, while eliminating most of the trades that would unnecessarily
churn an account.

4
 Fast Ball

The long trade variety of the Fast Ball pattern works best when the day that completes the
pattern comes on the heels of a pullback. Another acceptable variation would be a move that
emanates from a consolidation in an uptrend.

The idealized example below illustrates the setup for the long entry. The rules are as follows:

1. The precursor for pattern formation is a pullback in an up trend.

2. The stock must break out of the pullback in the direction of the original trend. The move
must represent the widest range of the past ten days, and volume should be higher on the
breakout day then the average daily volume during the pullback.
3. On the trigger day, we enter .10 above the high of the breakout bar. Stops should be ratch-
eted up as soon as the trade is profitable. We close the position by the end of the trading
day.

Figure 1.1 – An ideal example of the Fast Ball Type 1 or pullback pattern as it would appear on a daily
bar chart.

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Section One

The alternative setup involves a consolidation in a trend, and a range expansion move out of
the channel in the direction of the underlying move.

The rules for the long trade are as follows:

1. A trending stock must form a 5 - 15 day consolidation.

2. The stock breaks out of the channel in the direction of the original trend. The move must
represent the widest range of the past ten days, and vol- ume should be higher on the break-
out day then the average daily volume during the consolidation.
3. On the trigger day, we enter .10 above the high, or .10 below the low (for shorts) of the
breakout bar. Stops should be ratcheted up as soon as the trade is profitable. We close the
position by the end of the trading day.

Figure 1.2 – An ideal example of the Fast Ball Type 2 or consolidation pattern as it would appear on a
daily bar chart.

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 Fast Ball

Everyone has heard the adage buy the rumor sell the news, and 2018 kicked off with
many headline-driven moves in major stocks. Haliburton (HAL) provides a good ex-
ample of how positive news can lead to sharp declines in a stock’s price.

Analysts raised price targets on Halliburton to $69 after the company’s Q4 earnings.
The upstream recovery that took hold in North America appeared to have expanded
internationally. Indications were that Halliburton would benefit from rising upstream
spending in 2018, and would experience double-digit growth in North American com-
pletion spending. Analysts maintained the stock’s buy rating. (source: The Fly On
The Wall).

1. Positive earnings and analyst upgrades drove the price of HAL to multiyear highs
on January 23, 2018.
2. Profit taking hit the stock, and HAL made a sharp move lower.
3. A two-day pullback followed a steady descent to December 2017 support.
4. On February 8, 2018, HAL made a Fast Ball type-one expansion bar lower.
5. The following session, HAL traded lower and hit the profit target from my Around
the Horn Trading Plan (see next page), booking a .62 per share move.

Figure 1.3 – HAL trades through a Fast Ball Type 1 pattern setup.

7
Section One

Figure 1.4 – The Around the Horn Trading Plan - Note that all parameters are defined prior to
the next trading day, and that nothing is left to discretion.

8
 Fast Ball

Sometimes, a stock makes a directional move in the absence of significant news.

Whether the stock looks overbought or oversold, traders and investors decide to take
advantage of the technical indication, and the result can be a significant move, with
lots of potential for profits. Late in 2017, First Industrial Realty Trust (FR) started
making such a move. The result was a Fast Ball entry opportunity on February 6,
2018.

1. A sharp move lower from all-time highs as FR moves out of significantly over-
bought territory. The stock pulls back and starts trading in a loose range between
prior support and prior resistance.
2. A Fast Ball Expansion-of-Range-and-Volume move lower creates a potential oppor-
tunity for an FR short sale. The trading plan on the facing page is prepared for
the following session.
3. On the trade day, FR opens lower, then reverses to the planned trigger price. The
stock trades smoothly to the profit objective for a gain of .59 per share.

Figure 1.5 – FR trades through a Fast Ball Type 2 pattern setup.

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Section One

Figure 1.6 – my trading plan for FR has all the variables defined. The trade can be executed in a
very mechanical manner if it triggers.

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 Fast Ball

Summary
I first wrote about the Fast Ball pattern in 1999. Since then, it has been the bread-and-butter
trading setup in my trading business. This pattern capitalizes on institutional buying and sell-
ing and focuses attention on the fact that large players have a very hard time concealing what
they are doing.

When the markup or markdown process starts, our goal is to ride the coattails of the institu-
tional players to profit from their order flow. The Fast Ball pattern is not an attempt to rein-
vent the wheel. It is a simple setup that gets us in front of significant opportunity and pro-
vides potential trades nearly every trading day.

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Section Two

Section 2
Fast Ball XRV
The Fast Ball XRV Premium Trading Service capitalizes on the backbone of
the basic Around the Horn Fast Ball pattern and adds a sophisticated scanning
algorithm to spot repeated institutional buy or sell-side activity over the course of
the Fast Ball XRV trading day. The algorithm gives us additional insight into the
cause of the expansion move, and also allows for easier interpretation of Nasdaq
data.

The algorithm became necessary because price behavior in Nasdaq listed securities
is sometimes difficult to decipher. The overwhelming number of market makers,
electronic communication network (ECN), Alternative Display Facilities (ADF),
Trade Reporting Facilities (TRF), and dark pools that are operating at any given
time can put the brakes on the manual screening process. My solution to this was
to develop proprietary software that drills down through the data and analyzes
more than 8,000 listed stocks on the Nasdaq, NYSE, and NYSE/AMEX to create
the first cut of about 150 symbols for me to refine by hand.

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 Fast Ball XRV

Each evening after the closing bell, my algorithm spends a few hours putting a work-
able list together for me. I then evaluate each setup for suitability. When I finish, I
have as many as eight trading candidates for the following day. The analysis that I do
manually on this list is nearly identical to the best practices that I presented for the
textbook Fast Ball trade.

In a nutshell, the rules are as follows:

1. Using the proprietary algorithm, filter stocks for signs of institutional markup or
markdown.
2. Validate the pattern by ensuring that the stock has the widest trading range of the
past ten sessions.
3. Examine volume to ensure that the Fast Ball XRV day represents higher-than-aver-
age volume for the stock in trade.
4. Examine the intraday chart to ensure solid trend persistence.
5. Examine the intraday chart to find significant support and resistance that is ac-
companied by confirming volume-by-price data.
6. Evaluate intraday time-of-sales data to determine typical bid/ask spread and suit-
ability for trading.
7. If the Fast Ball XRV setup bar opened low and closed high, then we will look to
establish a long position the following trading session a few ticks above the high of
the setup-day bar.
8. If the Fast Ball XRV setup bar opened high and closed low, then we will look to
establish a short position the following trading session a few ticks below the low of
the setup-day bar.
9. The profit objective is either the first floor-trader pivot in the stock’s trade-day
travel range, or $1 per share in profits – whichever comes first.

In addition to rules 1-9, the following apply for automated trading:

1. For a long position to trigger, the stock’s price must first be less than or equal to
the prior session’s high.
2. For a short position to trigger, the stock’s price must first be greater than or equal
to the prior session’s low.

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Section Two

The following examples illustrate how we put the Fast Ball XRV setups to work in our
own trading business.

Example 1 – February 12, 2018

Only one stock qualified for the Fast Ball XRV Premium Trading Service for Monday
morning. ATRA Biotherapeutics (ATRA) met the criteria for a solid setup. The daily
chart below reveals that Friday’s trading in the stock (1) made a heavy-volume, wide-
range move. The stock opened in the bottom 25% of the daily range and closed in the
top 1%. Any trade above the Friday high will trigger a potential entry on Monday.

Figure 2.1 – In play since the end of 2017, the stock makes aFast Ball XRV move.

A look at the pivot data for the potential trade in ATRA reveals that there will be over-
head pivot resistance 43.75, and this will be our first target.

Figure 2.2 – Floor-Trader Pivot data for ATRA. For calculation inputs for each pivot, level see
traderinsight.com/howto/pivotlines

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 Fast Ball XRV

On Monday morning, ATRA opened just above the Friday close. The stock was
trading on wide spreads, with the bid/ask differential at nearly .35 per share. The
morning’s Industrial and S&P 500 futures were trading rapidly higher. The NYSE
and Nasdaq TICK were climbing. Finally, movement on the ATRA spread was in the
direction of the ask (the ask was moving higher faster than any fluctuation in the bid).
These factors all indicated that the potential for a directional move in our favor was
strong.

The 5-minute bar chart in Figure 2.3 shows the move on Monday morning. Fast Ball
XRV Premium Trading Service members had the opportunity to enter ATRA on the
open (1). Price quickly moved the stock to the initial profit objective at 43.75 (2).

Figure 2.3 – An orderly move to the first-resistance (R1) target within five minutes of the open.

ATRA shows the tendency for XRV follow through, especially when broader markets
correlate positively with the move we are waiting for. A closer look reveals that an au-
tomated order would have missed this trade. This is because our criteria for the entry
would be trade at or below the prior high. The discretionary decision to enter the
trade at the open was due to market conditions. An automated order would not have
had the liberty of discretion, and would have missed the trade.

Automation is something most traders attempt at some point. When it works, auto-
mation is great. When it fails, however, it can be extremely frustrating – and costly.

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Section Two

Trade Automation Benefits And Drawbacks

In 20 years of trading, and teaching others how to trade, I have run across a common
thread that runs through the fabric of nearly all of the thousands of traders I have met
– most traders do not trust themselves to act.

Most people who enter this business feel most of the following emotions when it
comes to executing their trading plans:

1. Distraction will cause them to miss opportunities – new traders often feel that they
lack the focus and experience to watch many stocks and act on opportunities as
they appear.
2. If a strategy failed before, it would likely fail again – it is psychologically less painful
to wait for additional confirmation for a potential position than it is to enter as
planned.
3. If a trade begins to make an adverse move, it is better to get out before it hits the
planned stop loss than to stay with the position – reentering at the planned price
will be easy, and a larger loss can be avoided.
4. If a trade is moving toward a profit target, it is better to take a profit early than to
endure a quick reversal – “no one ever went broke taking a profit.”

These emotions lead to bad trading decisions and send many people on a quest to
automate and optimize. This neverending journey starts very early in most trading
careers, and although I would say that it introduces more failure and pain than most
traders can endure, they almost universally try to take themselves out of the trading
equation.

The problem with automation is that there are a huge number of variables at play
in technical trading. I have frequently had acrimonious conversations with automa-
tion-hungry traders who want to know my exact logic for entering a position that did
not quite meet the parameters of the rules their automation was applying. The acri-
mony in every case comes from the frustration of someone who pours countless hours
into programming something, only to find out that trading for a living requires that
you conquer your psychological demons and realize that the war in this business exists
squarely between the ears of the trader – not in the markets.

To trade successfully requires focus and discipline. The desire to automate every aspect
of a trade, or to have someone else execute trades, reflects the fact that most people do
not think there is anything wrong with their focus and discipline. They feel that the
markets are too difficult to master and that the fastest route to success is the absolute
focus and discipline that only a machine can apply.

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 Fast Ball XRV

I believe that automation only works when a trader has mastered the entries and exits
and can follow a trading plan to the letter. Only when there is no question as to what
to do next does automation make sense. I automate what I know works. When there
is a need for a decision, I make it.

I apply automation to trading when the number of setups for a session is high, and I
know that I will not be able to get in front of all of the profit potential. In the case of
the ATRA trade in Figure 2.3 – a day that presented only one potential opportunity
is not a day that required automation. When I see multiple opportunities for a ses-
sion, however, I have some simple automation tools that I like to use for entries and
exits. These are called structured orders, and I will include the logic and implementa-
tion in two of the examples taken from the February 15, 2018 trading plan.

Automating Entries and Exits When a Plan Has Multiple Opportunities

Getting ready to trade on a day with multiple setups can be daunting for traders
who do not have a game plan. Figure 2.4 shows the stocks that had potential entries
on February 15, 2018. Note that there were seven stocks on the list for the day, the
markets were rebounding from a recent decline, pre-market futures trading indicated
a gap move higher that was well beyond calculated fair value, and that these factors
likely indicated fast price action on the open.

Figure 2.4 – Seven potential trades and necessitated trade automation at the opening bell.

This list of candidates is made manageable by automation. I will show two examples
– one that generated a successful entry, and one that failed to trigger.

Criteria for entering the automation parameters for these long trades are as follows:
1. If the stock opens or trades at or below the prior high, then I wish to buy using a
stop-limit order.
2. If the stock moves to first resistance or makes a one-dollar move in my favor, I will
sell the number of shares that filled on my entry order using a limit order.
3. If the stock hits my stop loss, I wish to sell the number of shares that filled on my
entry order using a market order.

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Section Two

A Successfully Automated Trade Execution

In the first example, Intracellular Therapies, Inc. (ITCI) creates the Fast Ball XRV op-
portunity as three days of aggressive buying culminate with an extreme close (1). Note
that the volume is high on the Fast Ball XRV pattern day, but that it is not the highest
of the three days (2). To me, this indicates that a seller has stepped out of the way, and
the stock has nowhere to go but higher.

Figure 2.5 – ITCI buying overwhelms sell-side pressure, and the stock breaks through resistance,
closing near the high of the session.
The target for a planned entry will be $1 or a move to first Resistance (R1) – whichever
occurs first. Years of careful review in designing the Fast Ball XRV trade indicate that
these targets are not arbitrary. In reviewing hundreds of trades, we have found that the
Fast Ball XRV pattern used for this implementation of the trade differs slightly from
the classic Around the Horn Fast Ball trade in that the price behavior of the XRV is
not as restricted by daily support and resistance as its Around the Horn counterpart. I
believe that this is a function of the order-flow bias combined with the XRV’s inclusion
of Nasdaq-listed companies. NYSE and Nasdaq may share in common the presence
of active ECN trading, but the similarities end there. Respect for prior trade levels is
far more pronounced on NYSE-listed securities, making support and resistance dating
back months or even years an important consideration. In the case of the Fast Ball
XRV, with its many Nasdaq trades, the primary concern is typical travel range and floor
trader pivot inflection.

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 Fast Ball XRV

The stop loss will be at natural support as determined on a 5-minute intraday chart
from the Fast Ball XRV setup day. This stop loss is at $18.90 in figure 2.6 and rep-
resents a level at which a breach of natural support (1) will also represent a move below
a significant volume-by-price area on the chart (2).

Figure2.6 – ITCI forms clear intraday support on a daily chart. The arrows (1) point to areas
late in the session that halted any attempt by the stock to move lower. The volume-by-price data
on the right side of the chart (2) shows that significant activity pushed the stock higher once
ITCI was above the $18.90 support threshold.

With the entry, stop, and target in hand, the order parameters for ITCI can be entered
and automated. Figure X shows how to populate the entry criteria in the RealTick
trading platform. Other platforms will vary, but the basic order actions will remain
the same.

First, note that I will require that, on the trading day, ITCI will need to trade at or
below the high price of the setup-day session. Specifying a trade-through price helps
ensure that price for the long entry does not activate a trade by moving lower. ITCI
will need to trade through the trigger from below for the trade to go live.

The parameters entered into the conditional order form in Figure 2.7 would cause a
trade stop-limit order to become a live order if a trade prints at or below $19.43.

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Section Two

When a trade at or below $19.43 hits the tape, my order will go live if a trade prints at
or above $19.44.

Once activated, my conditional order will fill me at any price available up to $19.54,
which is the limit price. The limit price is the worst price I am willing to accept in this
long-side trade

The parameters entered into the conditional order form in Figure 2.7 would cause a
trade stop-limit order to become a live order if a trade prints at or below $19.43.

Figure 2.7 – ITCI conditional order. This stop limit order requires trade at or below $19.43 to
activate. Once the order is live, the trigger is $19.44. The worst possible fill price is $19.54.

The next step in the automation process involves adding an exit order. In this case, if
ITCI triggers an entry, we want the machine to close out the same number of shares
that were filled on the entry at the stop loss price using a stop-market order. The stop
order will ensure that we are filled with a market order if the stock hits the stop loss.
Figure 2.8 shows the structure of the subordinate conditional order.

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 Fast Ball XRV

Figure 2.8 – The subordinate order for ITCI will go live only if the entry order in figure 2.7
filled. Whatever number of shares from the initial entry order filled will also transact if the stop
loss is hit.

Finally, we need an exit order if ITCI triggers an entry and moves to the profit target.
To accomplish this, we use another subordinate order as seen in figure 2.9. This time
we will enter a conditional order that closes the position if price moves to within a few
pennies of the pivot or $1 targets.

Figure 2.9 – Exit order will close the trade for the same number of shares that filled on the entry.

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Section Two

The chart in figure 2.10 shows what happened when ITCI opened for trading. The
stock opened slightly above the planned entry price, missed our trigger criteria, traded
all the way to the profit target (1), and then reversed. The reversal brought ITCI price
action into the activation range programmed in figure x (2). Price was now at or below
$19.43, and any move to or above $19.44 would trigger an entry. ITCI continued mov-
ing lower, then reversed well above our stop (3), and began climbing higher. The entry
price hit (4), and the stock traded smoothly to the exit level specified in figure 2.9 (5).

Figure 2.10 – The conditional and subordinate orders for ITCI handled the trade perfectly. A
discretionary trade on the opening bell would have added to the bottom line, but was not triggered
in the automation sequence due to the <= restriction in the order.

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 Fast Ball XRV

A Failed Execution Using Trade Automation

The previous example showed a positive outcome using automated orders. Frequent-
ly, however, set-it-and-forget-it orders experience trigger failures. The example in figure
2.10, Sabre Corporation (SABR) generated a picture-perfect Fast Ball XRV setup (1)
and appeared ready to follow through the following day.

Figure 2.10– SABRE Corp Fast Ball XRV Daily Chart

The automated order would be set up in the same manner as the previous example.
The High of the setup day is $21.57, so SABR will need to trade at or below that price
to trigger an entry at $21.62 using a stop-limit order. Figure x shows the Conditional
Order entry screen populated with the trade parameters.

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Section Two

Figure 2.11 – SABR conditional stop-limit order.

Note that entry will only occur if SABR trades at or below $21.57, then look at the
chart in figure 2.12. In the 5-minute chart, we see that SABR opened at $21.96 (1),
and only traded down to $21.59 before reversing and hitting the profit objective at R1
(2). In this case, the order automation failed to trigger the stop-limit order, and SABR
moved to the profit target without us.

Figure 2.11 – The conditional order never fills because of the gap between the high of the prior
session and today’s low.

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 Fast Ball XRV

Summary
The Fast Ball XRV is a modified version of the classic setup. It capitalizes on the fact
that market volatility (the good kind) is back, and gets us in front of significant op-
portunity in NYSE and Nasdaq-listed stocks. The algorithms used to find the setups
make a good thing better by finding the footprints of very specific institutional mark-
up and markdown activity. The ability to spot this large-scale buying and selling puts
us in position to ride the wake as the whales move through the markets.

My subscribers and I are very enthusiastic about the Fast Ball XRV, as it has pro-
duced outsized results since I first published it. It also provides a window back to the
trading of the late 1990’s, when momentum was king, and stocks in motion tended to
plot a course straight to a profit objective. While the volatility of that era was limit-
ed primarily to the tech and dot-com sectors, today’s volatility is more broad-based.
Moreover, even though decimalization has narrowed some of the potential profit
range, the fact that momentum is currently found in nearly every sector more than
offsets the tighter trading.

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Section Three

Section 3
Baltimore Chop
… A ground ball that hits in front of home plate (or off of it)
and takes a large hop over the infielder’s head.

Trading the open can make for a very rough ride. Things can get particularly hairy
when there is a significant gap due to erratic behavior in the overnight futures
markets. The Baltimore Chop is an intraday pattern that uses basic statistics and
five-minute bars to find a high probability turning point after an opening that
overreacts to company news. It is easiest to execute as a long strategy from a sharp
gap down open, but it works equally well as a short sale.

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 Baltimore Chop

The Baltimore Chop relies on some basic principles of statistics to derive a setup. For those of
you who shudder at the very thought of mathematics, take a deep breath and rest assured that
it’s going to be all right, because the concepts that need to be understood are the most fun-
damental computations in any first year college text on the subject. That being said, there are
three inputs that are required to compute the parameters for trade entry. The first is the Stan-
dard Deviation (SD). The formula is as follows:

In this case, the average we are using in the calculation of SD is the mean value of True Range
which represents price volatility by calculating the difference between the True Range High and
the True Range Low. To perform the calculation for each day in a series, note the current bar’s
high or the previous close, whichever is greater. Call that value TRH. Next, note the current
low or the previous close, whichever is lower. Call this value TRL. Now perform the simple
calculation TRH - TRL and voilà, True Range!

Now comes the fun part. We will walk through the process of performing the calculations for
validating the Baltimore Chop pattern. Once this portion of the chapter is completed, you
should be able to enter the formulas into your real-time charting software and obtain alerts
when any of the stocks on your scan list meet the criterion established.

Let’s use data originally published in Around The Horn to perform the calculation. The time
period is October 9 - October 20, 2006. The market was trending strongly, with minor S&P
resistance right around the 1370 level. Gap openings occurred regularly, and movement in the
S&P 500 futures acted like a magnet to pull the gap down openings up and the gap up open-
ings down. This made for a good trading envi- ronment, with the dominant trend being a good
predictor of follow-through and contratrend opportunities also present if we were to looking
for them.

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Section Three

The stock we will examine in the example is Encore Acquisition Co. (EAC). The true range
values have already been calculated and are as follows:

Table 3.1 – EAC Daily True Range Data

Now, we solve for SD by finding the square root of the average of the deviations for the ten true
range cases we are examining as follows:

Whch yields:

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 Baltimore Chop

The equation yields one standard deviation from the mean. Adding SD to the average
and then adding it to the high (high + (SD+average)) and subtracting it from the low
(low-(SD+average)) accounts for 68% of the variability we would normally expect in
either direction of price movement. For the purposes of the Baltimore Chop entry,
we are interested in two standard deviations, which accounts for 95% of the expected
range of price. To accomplish this, we simply double the standard deviation. Next add
the doubled standard deviation to the mean. The result, 1.17 is now again added to
the high and subtracted from the low price of the stock. The resulting prices are the
levels at which we will look to fade a gap the following morning. Then, we have the
following:

Lower Gap Reversal Zone 24.87 - 1.17 = 23.70

Upper Gap Reversal Zone 25.64 + 1.17 = 26.81

Table 3.2 shows the summary statistics for Encore Acquisition Co. for the days con-
sidered here. These are easily derived, necessary to complete the gap computations
and tell us a great deal about what is going on with the stock. Most analytical soft-
ware will provide these descriptives, and it is always good practice to display them
for the core group of stocks that you will be trading. This completes the process of
calculating the Gap Reversal Zones for the Baltimore Chop pattern. Next, we will
look at the rules for pattern entry. Then we will examine the actual move in Encore
Acquisition.

Table 3.2 – Encore Acquisition Co. descriptive statistics.

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Section Three

Once the calculations for the setup are mastered and programmed, this a pretty simple pattern
to find and trade. To make it work, you need to establish a means of finding morning gaps in
either direction, establish 2.0 SD validity and then monitor for volume and price to indicate a
reversal is in the making.

The ground rules are as follows:

1. A gap opening sends price dramatically away from yesterday’s close.
2. An interim support/resistance area forms at or beyond 2.0 standard deviations above the
high, or below the low, of yesterday’s range and the market fails to confirm the extension
by way of volume.
3. We enter the trade just above the high (long trade) or below the low (short trade) of the
last bar in the pullback. If the stock trades in a consolidation range before reversing, we
enter on a breakout of the range.
4. The profit stop is maintained at the reversal of 2 closes on a 5-minute chart, or at a 38.2%
retracement of a larger move.

Figure 3.1 – The Ideal Baltimore Chop pattern on a five-minute chart.

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 Baltimore Chop

Expedia Inc
Expedia Inc (EXPE) was down over 15.4% to $103.98 in pre-market trading, after-
disappointing earnings reported the prior night after the close. The drop set a new
52-week low for the stock. Piper Jaffray cut its price target from $150 down to $135.
Benchmark and Needham downgraded the stock to Hold. UBS, Citi, and Deutsche
Bank defended the name and called the post-earnings sell-off “overdone” (source
(The Fly On The Wall). These factors alerted us before the opening bell that EXPE
would likely move more than two standard deviations of true range on the open.

1. EXPE gapped open and qualified in our First-Hour Trading Pit as a high-proba-
bility Baltimore Chop setup.
2. The second bar of the session traveled lower, into the bottom of the first-bar
range. By the time the second bar closed, however, there was little room between
its 106.57 high (A), and the 106.70 high of the first five-minute bar (B). Because
the distance between A and B was less than acceptable regarding risk to reward
ratios traders had to think quickly to establish a logical target that would work
with the price action of the morning’s trading.
3. When an inside bar closes in tight proximity to the first bar of the session, the
high of the first bar is the entry trigger. Using the high of bar one as a trigger re-
moves the obstacle of clearing the first bar high on the way to a profit target, and
is an important modification, as it capitalizes on ease-of-movement once the stock
begins it’s price reversion to the mean true range.

Figure 3.2 – A qualified open in EXPE is followed by a wide-range fade in the second bar of
trading.

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Section Three

Questions:

1. Based on the information in the chart so far, where would you consider an entry in EXPE?
2. Where would you place your profit target(s)?
3. Where would you place your risk stop?

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 Baltimore Chop

Fibonacci retracement lines are useful tools employed by many short-term traders. The fact
that the Fibonacci study provides a predictive indicator of where price is likely to move next
elevates its utility for the modern trader. The Fibonacci tool in most quality trading software
allows for the plotting of retracement and extension zones, and also allows the trader to specify
which ratios to use or the plot.

Although the preference of which retracements and extensions to use on a chart varies from
trader to trader, I like to keep things pretty simple. For retracements, I use .382, .50, and .618.
For extensions, I use 1.382 (138.2% of the measured move), 1.5 (150.2% of the measured
move), and 1.618 (161.8% of the measured move).

I draw the study using the trough (1) to peak (2) of the bar-one range. I anticipate a first inflec-
tion at the 138.2% line (107.57), an initial target at the 150% line (107.84), and an extended
target at the 161.8% line (108.10). I plot these lines right after the first five-minute bar closes,
and will use them only in the case of a second-bar entry, or when a third bar will trigger at the
bar-one high because the second-bar high is very close to the first-bar high as is the case with
EXPE.

The 38.2% Fibonacci retracement level overlaps with significant volume-by-price data, indicat-
ing a risk stop level just below 105.85.

Figure 3.3 – The narrow spread between the high of the second bar and the high of the first dictates the
use of a profit target based on a Fibonacci study drawn from the low to the high of the first bar.

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Section Three

The third five-minute bar of the session violates the bar-one high and triggers an entry. EXPE
moves to the 150% extension target at 107.84 (2). The approximate profit opportunity for the
trade was $1 per share traded. The exit was within a few ticks of the day’s high. The stock
reverses lower and continues traveling in the direction of the morning gap (3).

The most important thing to note here is that everything was planned before the trade was exe-
cuted, giving us the courage of our convictions, and allowing us to gauge success by the proper
implementation of our trading plan, rather than whether or not a profit was made.

Figure 3.4 – EXPE moves with laserlike precision to the 150% Fibonacci extension target, then reverses
and closes out the day with a trend move to the downside.

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 Baltimore Chop

Fortive Corp
Fortive (FTV) corporation reported earnings of .95 per share versus consensus of .78, and
CEO James Lico stated: “With the Fortive Business System as our cultural cornerstone, we are
confident that we will continue to deliver earnings outperformance in 2018 and long-term
shareholder value for many years to come.” The news sent the stock on a two standard devia-
tion Baltimore Chop gap that played out perfectly.

1. Fortive Corporation (FTV) gapped over six dollars higher and qualified as a Baltimore
Chop reversal candidate in the Traderinsight.com First Hour Trading Pit (1). The stock
began making a reversion-to-the-mean move in the first five minutes of trading.
2. We hoped to see a retracement into the morning range (2) and a textbook entry.
3. The magnitude of the initial morning move, however, had us planning for a second bar
entry below the low tick of the first five minutes of trading (3), with a target at underlying
floor-trader-pivot support at first resistance (R1).

Figure 3.5– We would prefer a retracement into the range before a short-sale entry, but FTV appears to be
moving into the bottom of the first five-minute range creating a high likelihood of a bar-two short sale.

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Section Three

At 9:35, FTV’s second bar opened inline with the prior bar’s close and started moving lower
(1). Moves like this require experience and discipline that result from watching countless
scenarios unfold over many opening gaps. The moderator in our First Hour Trading Pit fre-
quently tells our members that this is an advanced entry and that stop losses need to be tight
and based on order flow.

On this particular morning, volume-by-price data and five-minute price action warranted a
72.11 short sale entry (2), a 72.61 stop loss (3), and a 71.28 target at R1.

FTV made a fast move lower, triggering an entry. The travel time to R1 was typical for a
NYSE listed stock. Note that the price elasticity of R1 repeatedly tested and that ultimately, a
move to the central pivot (P) provided an extended profit objective and was well within the
prior session’s range, making a move that was adverse to our potential profitability less and
less likely as time went on.

Figure 3.6 – FTV triggers an advanced entry, and the rule-based Around the Horn system provides the
logic to capitalize on the profit potential of the mean reversion.

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 Baltimore Chop

Summary
The Baltimore Chop gap fade is the only trade that I know of that puts statistics on a trader’s
side when dealing with a volatile open. This trade uses the basic principle of mean rever-
sion to determine when a gap has overextended a stock’s trading range into the 95% tail of
the probability distribution. With practice and discipline, this trade can become the earn-
ings-season goto strategy for any experienced trader.

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