Friday, August 5, 2011
Other options on wide range days
On days when many bars are the size of a normal day, I look to other options than the five minute chart for trading. I have used 1 minute chart, 4500 tick chart and recently, 20K and 10K volume chart. The 1 minute chart has the advantage of a fixed time before the print of the next bar but often gives poor signals, especially reversal signals. Tick charts have lost some of their relevance since the exchanges changed how they reported tick data and are now similar to volume charts. Although I do not have sufficient experience with any of these, I prefer volume charts slightly over the other two because of fewer bad signals. Today's entries have been off 10K and 20K volume charts and the markers on the charts represent the canonical entries rather than actual entries. (To some extent this is true of every day).
The advantage of volume charts and tick charts is that you can adjust the count to whatever gives you a bar size that you deem acceptable risk. The disadvantage is that bars can print very quickly. During b5 today, some bars on the 4500t and 20K volume chart printed in under a minute, so you have very little time to act and the pressure may force errors.
The second option is to actually trade options on the underlying -- SPY in this case. Option positions do not move as quickly with the underlying as futures do and are best used for swinging positions over a few days, but on large days like today, they become very viable. I personally only trade options after the day has proven to be a large day and shows the signs of a strong reversal. If the close is strong (unlike today where it pulled back before closing) its often a good idea to carry it to the next day except on Fridays since the option loses 2 extra days of time value.