Jacobs Ladders is a trading system that provides perspective on high quality, profitable trade setups for day traders. The purpose of this blog is to educate day traders on this trading system and provide links to the levels on a daily basis. You may wish to bookmark this page.
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The objective of the Jacobs Ladders is to help day traders identify and capture a minimum price movement between any two adjacent pivot points. This system when used correctly will improve the consistency of winning trades and helps minimize risk and losses.
In this weekly blog series, I will point out set ups that occurred during the past week that are illustrative example of how to use Jacobs Ladders for day trading. These examples have been tweeted out on our public twitter feed, you can follow along here @the_artofchart.
For more educational information, please see the previous introductory post introducing Jacobs Ladders day trading system which can be found here
This week was great on Jacobs Ladders because we had good trending price moves. The levels are excellent in predicting next pause and conversion area when price starts to trend. In order to understand the examples I post below, I repeat the basic rules of using the system.
– How levels are arranged
– Levels that can be blind faded
– Importance of Extreme Levels
A day trader should be prepared to trade both two sided days and trend days. Most days are two sided days – prices close above Low or Below High. A trader can buy the level Low or Sell from Level High.
These levels also serves important purpose by identifying trending days. When price breaks beyond Level High or Level Low, it shows trending price. It warns trader not to hold under water positions. Trader can lean on the levels to trade in the direction of the trade
Blind fade levels
A blind fadeable level is a price where you can place a limit order in advance. It is because they have extremely high likelihood of getting a reaction to get a risk out after taking a small profit ($75-$100 per contract depending on instrument). Once you get that much profit you immediately book it on at least one contract and move your stop to break even.
These are the only blind fade levels:
Extreme High 3
Extreme High 2
Extreme High 1
Extreme Low 1
Extreme Low 2
Extreme Low 3
A hard stop is required on all of these levels. This is because price has not shown that it is going to reverse here. They are blind fade because of their statistical history. But on extreme trend days level high and level low can get blown past without any reaction at all. Especially when price move is driven by news events.
Note Only the first test of these levels are blind fades. Subsequent tests must demonstrate S/R before attempting trade
Objective of a trader is to go with the trend and not fight the trend. So letting yourself get stopped out for a -1 handle loss is a good thing. It prepares your mind to look for entry into the trend by watching for conversion of these levels.
How much stop room should be given? I trade with extremely tight stops and re enter a trade if the trade is valid. Personally I do not give more than 1 handle room for level High and Low I give 2 handle room for Extreme levels . But I am always prepared to get right back in the trade if they levels are still exhibiting support or res there.
I want to stress this aspect. Re entry is very important aspect of using Jacobs Ladders system. Sometimes price may do a one spike candle to stop you out and close right back within the level. So watch price and get right back in the trade. This really protects your account and your mindset . If you are staying underwater in a position with 5 handles draw down it affects your mind and judgment of future trades.
Jacobs ladders have many levels for this very purpose. Getting stopped out of level Low may get you a better entry in Low1 for examples.
All extreme levels High and Low are exhaustion areas of a major sell or a pop in price.
They are very likely to get risk out. They may dip first but it is very rare to not get at least $100 worth of risk out on a single contract from this level
Remember these patterns
If price move is stopping at Extreme level 1, natural reversal is to level Low or High
If price move is stopping at Extreme level 2, natural reversal is to Extreme level 1
If price move is stopping at Extreme level 3, natural reversal is to Extreme level 2
So if you catch one of these levels, it would be prudent to leave a runner to the level next.
Often you will see Extreme levels are key trend reversals. It may continue reversal for several days.
Making the max out of a runner
It requires minimum two units of contracts to get the full benefit out of the Jacobs Ladder systems. A unit may be one contract or 10 depends on your account size, number of contracts does not matter. The first unit should be booked for getting the risk out and entry should be moved to break even. The second unit is ideally booked at the next level unless you see reasons to keep it for more because of your situational awareness as a trader.
However you can take that second unit at next level and put it back on when next level is converted as entry into your original trade. This way you can keep that second unit and use the levels as price to keep booking profit as price keeps moving up. If your account is trading in 3 units position, then the second unit is ideally booked at the next level from entry and keep the third unit for keeping you in the trade booking profit and re entry.
No one knows how far price will go on trend days. Using the levels system gives you notches in that price ladder to take maximum profits. It is better than blindly trusting the trend only to see price retrace and your unrealized profits vanish.
Incorporating swing outlook into runners and entry
If you are also a swing trader and have a entry and exit area, use Jacobs ladders to:
(1) Improve your entry so that you can avoid entering at bad price point and holding underwater positions.
(2) Exit runners at right price points and re enter at right price as good swing move does not go in a straight line. It helps you book profits at right levels and re-enter trade.
Example 1 ES Dec 11 Monday – How Level High converts to support and gives entry into up trend
Observations of Jacobs Ladder rules
– Level OPG gives support two times for long entry
– Level High blind fade fails . A -1 stop out would avoid a lot of pain !
– Level High1 – price pauses here exactly on the level , example of how levels work. it is not a blind fade so it needs some quick decision making to get that short entry.
– Level High back tests as support
Example 2 – CL Dec 11 Monday how to catch a move up
Observations of Jacobs Ladders rules
– Level OPG gives long entry set up
– first test of level High gives a good short trade
– Second test of high breaks above – example that only first test of this level is blind fade and subsequent tests must be taken after validation of S/R
– Now one must be on the look out for getting a long entry as this is a sign of trend up
– first back test of level High DOES NOT demonstrate support so no long entry here
– next price shows support at Level Lower High – this is a long entry
– watch if level High exhibits resistance . Break of level High is confirmation of long set up and this is an important test. No resistance whatsoever . All 5 min candles were making higher lows
– price keeps going up a day trader ideally would cash out at High 2 but combining swing outlook from AOC will allow you to keep a runner going
Example 3: CL Dec 12 Tue – How to trade with tight stops
one of the key advantage of the ladder system is that it enables you to trade with tight stops. There is no need to stay in an under water position because you believe price will bounce. Instead, one should always try to find a level that is close by
Observations of Jacobs Ladders rules
– first pass of level Low gives 10 tics bounce and gives break even stop from entry
– max stop 10 tics ($100 worth) would prevent further loss
– price however stalls and bounces. once it is above level Low, use the nearest defining bounce candle as a stop level to lean on. if this is a real move up it must go. Otherwise it would let you stop out for a small loss
– this day price was indeed up trending and that 57.12 gave a price to lean on.
– Notice if that that 57.12 were to break, it would have fallen more below level Low so 51.12 acts as a very tight low risk area
– Key is to latch on the defining candle that showed support above level Low
Example 4: ES Dec 14 Thu Level Low conversion brings trend down, short entry and Extreme Low 1 bounce
Everyone knows this is an extreme bull market. But where do you go long on a sell day? going blind long at random places may let your position go deep under water, causing you bad stops and shaking your confidence in subsequent good trades. This is where Jacobs Ladders gives you clear price pause area. There is no reason to take more than a -1 or -2 stop from a bounce area set up. There will always be a bounce set up in the ladder system.
Observations of Jacobs Ladders rules
– Level Low bounces nicely on first test
– Second test pierces below
– Subsequently Level Low converts as resistance and gives short entry
– Level Low 1 next concerts as resistance and gives short entry
– First test of Extreme Level 1 bounces +5 handles
– Extreme Low 1 tests support second time , makers higher low and long set up another +5 bounce
– Third test does not show support, no long entry – one must not be long here
– After hours it recovers support giving long entry again
– Ex low 1 continues to bounce overnight giving +10 by market open
– Rule :Extreme Low levels can be signnificant reversals levels.
– Example how to combine situational awareness and swing outlook from Art of chart to keep runners going. Stan calls bounce from here and next day price trends up to 27 handles
Example 5: ES Dec 15 Fri How to stay in the trend with a runner to catch the maximum move
This was a strong trend up day continuing from previous day’s Extreme Low 1 bounce.
When price trends, the ladders system keeps a runner in the trend by booking profits and adding it back when trend continues.
It is a far better approach than blindly trusting that it is a trend up day and not booking profits only to see that price retraces and watch your unrealized gains vanishing.
Observations of Jacobs Ladders rules
-Price never loses Open, giving long entry right away. This is also querterly option expiry day which is usually not a red day. This gives signs of move up to level High. How high it goes no one knows.
– level high hits and one usually books profits from Opg level as this is stall area
– Level High converts as support
– This gives confidence price is headed to level High 1 and gives long set up. A good use of this set up is to put back what you booked as profit at level High.
– Level High 1 hits and stalls, one books profits from what was added back
– price keeps coming back above level High 1, which is another long add, typically what you took off at level High 1, now you shoot for level High 2
– level high 2 hits, books profit
– Level high 2 is stall, a short entry also.
– 15 minutes before close prices sells , back tests level High as support it is another long entry, typically add back you took off at level High 2
Using this method would have allowed you to catch almost all move to to 83 from open
Here is how TOS chart will look like where you have a 9 cell grid for various instruments with levels loaded. You only need to update the study on one chart. Levels will load automatically on all other instruments for which Jacobs Ladders levels are available.
I hope this educational post helps you understand how to use Jacobs Ladders. Please look for our educational posts on our public twitter feed at @the_artofchart.
Links to past Weekly Reviews:
– Jacobs Ladders Weekly Rewind for Week of Dec 4