Wednesday, October 16, 2013

Targets on multiple contracts

I've been experimenting with various exit strategies and my current strategy is the following:

When trading one contract, exit at 2x risk (for CL 10t stop, 20t target)

When trading two contracts, exit one at 2x risk, one at 5x risk (10t stop, 20t, 50t targets)

When trading three contracts, exit two contracts at 2x risk, one at 5x risk (10t stop, 2x 20t, 50t targets)

When trading any other even number of contracts, divide in half and trade like its two contracts.

When trading any other odd number of contracts, exit half + one contract at 2x risk, half - one contract at 5x risk. (i.e. for 5c, exit 3c at 20t, 2t at 50t)

The 5x risk above is a swing target and must be adjusted according to market action. For example, you may need to make the target modest if the day looks like it will be small or let it run if the market looks like it could run all day.

Note that Ninjatrader summary of trades uses the first exit to denote exit time and your swing exit can only be seen if you uncheck "Group Trades by ATM strategy". Therefore to see your swing exit, you need to parse through a longer table as shown below:

Friday, October 11, 2013

Trendlines and TCLs as targets

Just as a TL indicates favorable locations for entry, TCL typically indicates favorable location for exit. This is because price typically moves in channels and traders enter near one end of the channel and exit on the other.

When the channel is steep and narrow, the market is typically trending and trading is feasible only in one direction.

When the channel is wide and not very steep, it becomes feasible to trade in both directions.

Today's trades show two setups where exits are made at TL and TCL.

Trade #2 was a short which reacted at the TL and forced an early exit.

Trade #3 was a long which poked the TCL and was a favorable exit. A TCL violation and a large bar are both signs to exit since a potential extended pullback is likely to follow. The sidebar image shows an exit order placed at the TCL.

Any shorts at b22 should look to exit near the test of the TL (near b27).

When a TL cannot hold the price, you may see a breakout well beyond the TL or may react very weakly. Such an event is a trend break and you should no longer trade in the direction of the trend. Continuation trades are typically such breakouts beyond the nacent counter trend in a pullback (b7,10).

Friday, October 4, 2013

Shallow and deep pullbacks with trendlines

I have often advised new traders to only trade deep pullbacks or obvious pokes into the trendline. This is usually very good advice on most days. The only exceptions are possibly hard trend days, where you can really take any small bar near or touching the trendline and soft-trend days, when you can take any fL2.

Trade #1 illustrates a shallow pullback. The price barely pokes beyond the trendline. The signal bar b6 is also a poor bar and in the middle of a BW. However, 2L 1PB when successful can go quite a while, so I often take it despite it being a lower probability trade.

Trade #2 on the other hand illustrates a deeper pullback. b10 clearly has poked well beyond the TL and therefore is more likely to give an entry bar (b12) that does not take out a stop.

Trade #3 is an fBO trade. Note the smaller size since its always better to sell the next pullback after the fBO succeeds

Trade #4 is a reasonably deep pullback since b27 poked many ticks beyond the TL and also gave an entry bar b28 that did not take out any stops.

Trendlines enable entries and also point out obvious exits. For example, the W down to b13 violated the TCL b2,8 and the the sell from b27 stopped at the trendline from LOD of prior day.

With discipline, simply entering on every deep poke of the trendline should be a viable trading strategy.