Setup: Connect 2 and Extend

I didn't expect to write anything tonight, but I saw a setup today that compelled me enough to put forth the effort.  I usually don't go into much details with trades generated from Diamond Setups, out of respect for the fact that it's a proprietary system.  And I don't take many non-Diamond Setups trades.  But there are a few setups that I still take on the rare occasions when they do come up.

I just can't help it, I usually pull the trigger on those non-DS setups, knowing that I'll get dinged on my execution score -- simply because they are based on setups I've researched or taken over time and they just call out to me.  Perhaps I should just update my trading plan to include these types of setups so they're not considered an exception?

I didn't have a formal name for this setup, but I'll just call it "Connect 2 and Extend", since it's based primarily on connecting two points and extending the trendline.  It's relatively simple, although like nearly all setups, there is some "art" associated with it.

Here's basic recipe (generally works on all timeframes):

• Connect 2 significant swing highs/lows and extend the trendline to the right
• Look for points where the extended trendline intersects with another point of interest, such as a moving average, vwap, Fib, another trendline, etc.
• When the fast stochastics (8,3,3) is above 80 or below 30, and price is hitting the confluence of the extended trendline and at least one other support/resistance, enter at a price as close to the trendline as possible
• The stop is generally placed a tick above/below the trigger bar
• Profit target for ES would be +2.00 for the first target (or use whatever scaling out method that works for your style)

Here's an example of the setup that took place today.  I did *NOT* take this trade today, since I was not trading this afternoon.  At the time of the trigger, here's what the screen looked like:

ESM2 - 3/20/2012 - Setup view

And after the fact, you can see how well both the support/resistance level right around 1398 was respected, as well as the upward sloping trendline.  Depending on your level of aggressiveness, there were multiples places to enter trades today based on the trendline, although the only one that meets the criteria for this setup is identified in the chart above as well as the blue arrow in the chart below.

ESM2 - 3/20/2012 - Results view

I also use to this method to enter trades based on the 15 min or daily forex charts, and it has also worked with stocks.  What's really great is when this setup lines up with the Diamond Setups once in a blue moon on the ES -- then the outcome is usually quite magical.