Blog for Trading Success

Yesterday I outlined the way I saw the ES based only from a Barros Swing perspective. Today I want to review trade management using Market Profile. But before I do that, let’s have a look at how I arrived at the 1405 (basis cash) being the top of the ‘make or break level’ for a bearish view of the S&P. Figure 1 shows the Primary Buy Zone of the breakdown.

Figure 1 S&P Daily

Now let’s look at managing yesterday’s ES.

You will recall that yesterday we had two options for an initial trading strategy. One involved the scenario that occurred: an open- gap up with no closure of the open-gap in the first 60 minutes. Figure 2 shows the Market Delta software and the breakout volume that occurred at 1351 and 1351.5 (For me acceptable breakout Delta volume is 2000 or more). If I were trading, I’d have been filled around 1351.5 to 1352.5.

Figure 2 Market Delta

If I day trade, I use the 80-min chart for context and the 30-minutes or 15-minutes for execution. In this case, once filled on the initial upside breakout, I’d have a stop and reverse (because of the context) at 1337.75. This was a 14-point risk I was happy to take because I was anticipating a trend day. The mean and standard deviation for a trend day are 45 +/- 15. So the minimum risk was 14:30 (45-15). In addition, with trend days we can expect the market to close near its highs. This meant I had some probability of gaining more than 30 points. Hence the 14 points was an acceptable risk.

I was looking for a trend day because of the unfilled open-gap after 60 minutes and the failure of the market to continue South after Friday’s price action. You will recall that in an earlier Market Profile blog I said that unfilled open-gaps are a reliable indicator of trend days. I also said that often traders fail to take advantage of the trend day. In the rest of this, I’ll be seeking to show how I manage slow trend day trades.

If I suspect that a trend day is a probability, I first plan my initial position size: this would be anywhere from twice normal size to normal. In this case, I’d have started with twice normal because of the context of the trade and the unfilled open-gap.

Figure 3 Market Profile

Figure 3 is yesterday’s profile displayed as 30-minute bars. Let’s say that in my first trade at 1532, I took 10 contracts in the ‘C’ period.

My next trade would have been in the ‘E’ period breakout. I’d have taken a buy had the market retraced more than it did. On slow trend days, I take each bar’s 3rd standard deviation as my buy zone and place my stop two points below the low of the first previous bar that is not an inside bar. If there is insufficient retracement, I buy the breakout. In either case, my stop is 2-points below the first low that is not an inside bar. In Figure 3, entry was on the high of ‘E’ 1355 and my stop at 1344. The reward was at least 13 points (1368 (estimated high, 1338 + 30) - 1355) and my stop 11 points. Still an OK Risk:Reward for a day trade. I’d have taken 50% of the initial position, 5 contracts.

I’d have skipped the ‘F’ period breakout (too close to the ‘E’ period entry price). The next entry opportunity was in the ‘H’ period. The breakout was a no-no, a possible 8 point profit (1386 - 1362) and a 10-point risk (1362 - 1352). Note that 1352 was 2-points below the low of ‘F’, ‘G’ being an inside bar. But in ‘I’ the market retraced to the bottom of H’s volume 3rd standard deviation. The risk was now 6 points (1358 - 1352) versus a 10 point (1368-1358 = 10) gain. An acceptable risk: reward.

On a slow trend day, I stop adding to positions on the third fill. My positions would have been:

• 10 @ 1332
• 5 @ 1352
• 2 @ 1358

The ‘K’ period is the critical period for the S&P, especially in a slow trend day. There is a 50-50 chance of my being stopped out in ‘K’ on a slow trend day. Because of this, I often exit the most recent contracts where the trailing stop would result in loss.

In this case, the trailing stop would have been slightly below 1355, say 1354. 25 (J period low 1357 - 2 = 1355. I don’t place stops at whole ‘5’s or ‘0’s). So the ones taken at 1358 would be out near the highs of J say 1361 (2 exited, leaving 15). I’d exit around half at 1368 (estimated day’s range) and the balance near 4:00 PM EST. (I seldom hold past 4:00 PM).

Results for the day:

• 2 (1358) @ 1360 = +2 x 2 = 4
• 5 (1352) @ 1368 = +16 x 5 = 80
• 2 (1332) @ 1368 = +38 x 2 = 70
• 6 (1332) @ 1370 = +38 x 5 = 228 = 382 points - brokerage

The key to the day was the way the trade was managed. Trade management is an essential skill to making money in the markets.

In the last 24-hours, I have seen two examples of what I consider inappropriate trade management. At one end, the trader trading a ‘day-trading’ timeframe placed a 2-point stop. Even for a trend day, this is way too close - unless you are scalping. A 5-minute bar has a normal range of 2 to 5 points. (3 = mean +/- 2 points); so even if you are trading a 5-minute timeframe the 2-point stops was just asking to get hit.

At the other extreme is a ‘non-trade’ by a well-known bank who had no exit plan for its strategy. This bank had convinced the client to allow them to swap a Singapore Dollar debt to a Swiss Franc debt to take advantage of the lower Swiss interest rate. Since the S$/CHF was fluctuating in a tight band, any loss due to the exchange rate was minimal. Effectively the plan is to repay the Singapore $ debt with CHF - this is akin to going short the S$ v.s. CHF.

Only problem? Look at what happened to the S$/CHF in Figure 4.

Figure 4 S$/CHF

I spent a couple of hours listening to a well-meaning Wealth Manager ‘ explain’ why trading in physical currencies (i.e. non leveraged) does not require exit strategies (stops): besides he was only doing the best for his client and it was the client’s bad luck that hers was the only one of his trades that suffered a loss.

If this attitude reflects the banking industry’s approach to risk management, it’s no wonder the sub-prime crisis occurred! The path to hell (financial disaster) is paved with good intentions.

By the way, I like the WM, he is a great guy, well-meaning, and genuinely believes he is doing the best for his clients - which makes this event even more horrendous!

Anyway back to a rambling blog. You want to succeed: make sure you position size correctly and then execute your trade management. This is a key skill.

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