Low Risk, High Probability Trade Set-Ups Using 3C

For those of you using 3C, I try to give you real world examples. Last week I thought TLT would be a great trade opportunity, today we are 2/3rds of the way to confirming that trade and entering it, but this isn't about TLT, it's about using probabilities and 3C to set up high probability, low risk trades.

For example, last week (Wednesday) I posted negative divergences in TLT and suspected it would be coming down soon. I said I didn't particularly like the idea of TLT short (TBT long-2x short TLT) although you could have taken that position. Wherever you first see a pretty serious 3C divegrence...

Using last Wednesday's chart from the post, TLT / Treasuries we can see it's around the $117.50 level, even though the divegrence may guild as this one did over the next couple of days, price will almost always surpass the area you first saw the divegrence once there's a reversal such as we saw today in TLT, meaning the probabilities of TLT pulling back to at least $117.50 are very high.

Today TLT pulled back to $116.75 so it already surpassed the target concept just mentioned above. While you could have entered TBT to rise TLT down, it's trading against the highest probabilities.

From today's post, TLT Update I posted these charts...

 The daily positive divergence from last year is a large, strong base and the daily chart is showing very strong underlying flow so this is the chart of highest probabilities and since it's still in line and not negative, it's still the highest probabilities which we want to trade with.

Just to make sure nothing has changed, the 60 min chart also shows 3C in line with price, thus the highest probabilities are for TLT to resolve to the upside.

Thus we look for a shorter term (smaller underlying flow) divergence like we saw last week.

This 15 min negative tells us a pullback is likely, we already knew this from last week.

 Confirmation is a very important concept when using 3C, so the 10 min chart tells us the same thing, a negative divegrence, a near term pullback which we already knew from last week's charts again.


Since we are in a new short term trend, we look to the fastest charts to see a change in character or in this case, accumulation since the highest probabilities are for a resumption to the uptrend.

At this point we have no position, we have no risk, we are just waiting for confirmation. The 5 min chart tells us that there's likely more downside as there's no positive divegrence there yet.

 Once the intraday 1, 2, 3, nd 5 min charts start going positive, we should see a reversal process start to form, at this point we know that the pullback is being accumulated to once again make a move higher along the lines of highest probabilities which are on the daily chart, then the 4 hour, 2 hour and 1 hour chart which all agree.

We don't enter until we see the pullback is showing strong accumulation and then the concepts of a reversal process and head fake move come in to play.

We now have signals telling us the pullback has been accumulated, it's not a downside reversal. We now have strong short term probabilities confirming the pullback was just that and we have a better entry at lower prices and thus lower risk. As long as the longer term charts still tell us the probabilities are to the upside and our short term charts agree, we can now enter long, trade with probabilities at the best price possible and thus the lowest risk possible.

As for targets where this may happen, I look to our custom Trend Channel which has held the entire uptrend of 2014 and should continue to do so.

The current stop for the uptrend is $112.50. I confirm using a moving average of the trend...

The 100-day works fine for this purpose and is around the same area, $113 or so. Now we know it's probable that the pullback will end somewhere above the Trend Channel and 100-day moving average, but even if it doesn't, as long as we have strong confirmation, we still have a strong trade. The Trend Channel holding the pullback just makes the trend and trade on a pullback that much stronger.

So we don't enter any trades, we have no risk until the probabilities that we expect to see, are confirmed. At this point, we have a high probability,low risk trade with an excellent entry.