The Mebob trade has been described incorrectly by many people. Probably the most misunderstood part of it has to do with the CLOSE on the buy and sell signal. The buy or sell signals are only confirmed by the CLOSING PRICE of the following 5 minute bars and NOT the high or low. The basic concept as I originally presented it to Avid is as follows.
1. The MEBOB bar is a five minute bar that starts at 9:05 CT and ends at 9:10 Central time.
2. If you draw a horizontal line on your chart from the high and low of that bar you have the key points for the day.
3. If you CLOSE above the high of the Mebob on any subsequent 5 minute bar you buy.
4. If you CLOSE below the low of the Mebob you sell.
The most asked question is, "where is the stop loss". That is pretty obvious by the rules but some days the Mebob bar is
quite big and for some to take a 8-10 point loss is more than they want to accept. My general answer is to use a 5.25 trailing stop on your entry. I have found over the years that if the market reverses more than 5 points from the buy or sell signal it will keep going.
Another point that needs to be considered to increase your probability of success is the technicals at the time. In the case of the
attached example from 6-12, the RSI was at a very high level and should have produced a 100% potential for a successful trade. On the other hand if the RSI had been under 30 and I got a sell signal, I would have been concerned that the potential for entering the trade was not good and would probably pass for the day. No reason to trade every day and if the technical are against you, why fight it. When Mebob works as it did on Thursday its a very profitable short term trade with minimum risk. You have your entry point and stop loss point established and then its just a matter of deciding how long you stay in. Although many people with no technical skill can make money by just using a reasonably stop on the trade and closing it at the end of the day. You will see on the
attached example, the market reversed from an RSI reading under
30 and provided a 15 point gain on the trade. It was also the close
from the previous day and an important low. No reason to expect much
more out of a day trade and time to take the profit.
I hope this clears up the Mebob trade for you. Like any trade it works best in a trending market. The concept also works in markets beyond the S & P.
12.10 pm Update:
4.00 pm Final result:
"We still have an 80% chance to see the last hour High to be the High of day"
From the 2.00 pm CIT Low, we saw an 18 SP rally into a last hour 3.50 pm High of day, filling the morning's Gap.
This rally was supported by the daily Cycles as the MC was looking for a 3/2 swing Low and we remain in a volatile rally phase into the next swing High.