ES: Managing Trades on A Slow Trend Day

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.

ES Intra-day Nature of Trend Material

I received two different requests for a template on an intra-day analysis based only on Nature of Trends material. I am happy to oblige but do ask you send in your requests to the blog rather than by e-mail. Also, please bear in mind that day-trading is not my preferred timeframe. I achieve my results trading off longer timeframe charts and entering intra-day.

My first question is what is the trend of the trader’s timeframe? The second question, is it likely to continue or change? My Trader’s Timeframe for day trading is usually the 5-period swing on the 80-minute. But in this case, the 80-minute is taking precedence and that shows a sideways market between 1405 and 1257 (basis June) (1397 and 1258 basis cash). As long as the market fails to accept below 1296 basis June (1295 basis cash), we can expect at least a retest of 1405 (basis June). I say this because of the market’s failure to head South after the breakdown to 1257 (basis June). This is all I see in the Trader’s Timeframe.

If I move to the next higher timeframe, the 5-day swing, I see that the make or break level is the 1405 basis cash. There is insufficient June data to assess a June level at this stage. Acceptance above 1405 (basis Cash) indicates that my idea that we are in a downtrend is probably incorrect.

My next lower timeframe after the 80-minutes is the 15-minute. This shows two equal probabilities in play.

  • Basis June, a move down to the purple rectangles in Figure 2 – they show three probable target areas: 1311 to 1313; 1303 to 1306 and 1298 to 1301. The most likely is the 1303 to 1306. Acceptance below 1296would invalidate the idea we are heading for a retest of 1405.
  • Basis June, the current down move is over and we’ll experience an upmove to 1359 to 1361 today.

At time of writing, the ES is at 1332.

The above answers the trend questions. The next thing I’d do is look for a zone to take my first trade. I’d also look for a zone that would negate the strategy. This I call my preliminary roadmap.

Today, my preliminary roadmap would be this:

  1. We closed at 1322.
  2. If the day session opens with at least a 5-point open gap i.e. 1327 or greater, I’d wait to see if the market closes the gap in the first hour. If it fails to do that, I’d buy the breakout of the first 60-minute range. If it does close the gap, I’d be looking at the character of the downmove to see if I can lean against 1322 close.

I hope you appreciate that by relying only on Nature of Trend material (i.e. leaving out the Ray Wave and especially the Market Profile), I am flying half blind. The Market Profile provides information for day traders unavailable from any other discipline.

I attach two charts:

  1. The 80-minute ES (day session only) and
  2. The 15-minute ES (day session only)


Figure 1 The 80-minute ES


Figure 2 The 15-minute ES

ES Comment

With no major news reports until Friday (Non-Farm), I thought it would be a time to revisit the ES.

Unless we can close at or below 1270 basis cash, the 12-month swing (yearly trend) has still to confirm the Upthrust sell signal. The 13-week (quarterly) swing in the meantime has to complete its Whole Point Count; but since the 12-month line has already turned down, the 13-week would play only a supporting role in the current price action.

This brings us to the 18-day swing (monthly trend). In Figure 1, the 18-day has moved to a low at ‘C’. My best guess scenario is a rally to at least 1373 (to turn the 18-day line up). I’d prefer a rally to above 1396 but below 1406. Why?


FIGURE 1 18- Swing

The 5-day swing (weekly trend) gave an Upthrust Change in Trend pattern (i.e. down to up) at ‘C’ in Figure 1. This projects a target to at least the Primary Sell Zone (we’ll look at these levels next) but generally, unless the market is very weak, we’ll see a breach of the 5-d high at 1396 but we’ll hold below the top of the breakout’s Primary Buy Zone 1406 (basis cash).


FIGURE 2 Market Delta

Figure 2 (basis June) shows the Market Delta shows that the selling volume on Friday in the ES was the largest of the previous 5 days. This suggests continuation of the downmove at least in the early part of the session. The Initial Balance and Type of Open will be important today – they will give us the all important indication of today’s market direction.

In the absence of that, I do have some observations:

The normal 5-d Corrective swing is 70 – 80 points. This projects a target to at least 1290 (basis June). However, Market Profile theory suggests that the bottom of the Value Area (see Figure 3) 1308 (basis June) needs to hold. Since there is a clear pivot low at 1295 (basis June), I am prepared to extend the support zone to 1295. Given this idea, I’d be looking for support between 1308 (bottom of Value) and 1295 (pivot low). The 1295 is close enough to the normal 5-d corrective move.

If 1295 holds, I’d be looking for a test of 1395 to 1406. Acceptance below 1395 augurs a close below 1270.


FIGURE 3 5-d Support and Resistance

Finally, Figure 4 shows that the current Initial Price Movement on a 30-min chart started at 1334. The normal 5-period swing on the 30-minute is at least 30 points (to a maximum of 45). So far we have covered 1334 – 1313 = 31. So it would not surprise to see development begin. If it does, we need to see 1226 hold (point of inflection); if the market accepts above 1226, we can expect to a challenge to 1340.


FIGURE 4 IPM 30-Minute

Risk Management 5

So far we have completed the way I assess position sizing. The next step is to manage the trade.

The first step is to identify the entry, initial stop and core profit exit- this is function of your plan.

The next step is to assess the trade’s risk-reward. Because I use the Rule of Three, I assess the risk-reward based on the core profit contract (usually the opposite Primary Zone) and average profit. The risk-reward must be at least 1:2 (based on the structural exit) and 1:1 (based risk compared to historical average profit).

Let’s look at an example.

Figure 1 shows the 5-d and 18-d swings in the ES. Let’s assume we are trading the 5-d and that the average profit per trade in the ES is 80 points. In Figure 1, the risk to average profit would be 1:2.2. Figure 1 shows that the structural risk-reward is 1:3.2

This trade has a qualified risk-reward.


FIGURE 1 ES Risk:Reward

So, before I even enter a trade, I first assess whether or not the risk is worth trading.

Once we are in a trade, we need to manage our risk.

The Rule of Three states that we cover the first 1/3 when the profits cover our risk on the remaining contracts. Unlike the core profit exit, this is a guideline rather than a fixed exit.

Figure 1 shows that the risk on two contracts is 66 points. Our entry was 1277; so, we’d exit the 1st third at (1277 + 66) 1343. But if we look at Figure 1, we see that the Point of Control is coming in at 1339.98.

We know that the 18-d is in a downtrend, as is the 13-w. So, we are trading a contra-trend move in the higher timeframes. In this situation, I’d look to exit before 1339.98, say 1335 to 1337. I then move my initial stop on the 2nd third to allow for the lower exit. So, if my exit is 1335, there is a difference of 5 points. I’d move my 2nd third’s stop to 1247 (originally at 1242; plus 5 = 1247). This way if stopped out, I’d preserve my capital.

Once the market has a bar’s range above the top of the Value Area, 1386 (i.e. a Whole Point Count of 1 above 1386), I move the stop on the 2nd contract to under the low of the Value Area. In the case of Figure 1, this area is between 1306 and 1275.

Once I exit the 2nd contract at the Primary Sell Zone, I’d bring the stop on the 3rd contract to breakeven.

On a breakout, to manage the 3rd contract, I use a trailing stop using:

  1. Swing lows or deemed swing lows and
  2. Bring the stops closer as the impulse move’s magnitudes moves to mean +3 standard deviations. At this target, I tend to bring the stops no farther away than breach of the 3-d low.

Of course if I have a Change in Trend Pattern, I’d exit on that even if the trailing stop is not hit.
There you have it.

We have covered the ground from Money Management to Trade Management: the two components of Risk Management. Happy trading guys and gals.

Risk Management 4

In the last blog, we completed the formula for a normal position size and now we come to “Ebb and Flow”.

I discussed the idea briefly in the Art of Position Sizing. As Pete Steidlmayer said: “Risk is managed by knowledge – knowledge of self and of the markets”. ‘Ebb and Flow’ depends on having solid data base.

The analogy I use is to say that our plan is a beach front; the market takes the form of rolling waves that at times totally cover the beach (Flow State); at times totally withdraw (Ebb State); and at times partially cover the beach (Normal State).

The times when the waves totally cover the beach are the times when we can do no wrong. Everything we touch turns to gold – these are the results some system/seminar vendors use to sell their wares. You have read them: “Look! A 90% return in capital in only 3 months!”. The implication is this ‘golden touch’ will continue.

But of course it doesn’t. The waves start to withdraw. Our ‘golden touch’ turns to copper – with some wins and some losses. This is the normal state.

Finally the wave totally withdraws – nothing we do is right (the Ebb State). We sell and the market goes up; we buy and it goes down. Sometimes it seems the drawdown will never cease. But of course, this state also passes; and the whole cycles starts anew.

Our job as traders is to be:

  • Super aggressive during the Flow State – I use Double Normal Size.
  • Use Normal Size during the Normal State
  • Be ultra-cautious during the Ebb State – I use Half Normal Size or totally with from trading.

How do you tell in which State you are in? You need to keep a detailed equity journal and learn to look out for tell-tale signs. One point is worth mentioning – we will always be late in identifying the Ebb or Flow. We identify an Ebb State only after a series of losses and identify the Flow State after a series of profits.

Tomorrow we’ll look at Trade Management and see how this ties in with Position Sizing.

Risk Management 3

In this blog, I’ll be looking at the way I would calculate my position size using a dollar criteria.

The inputs are:

  1. The average dollar win per trade.
  2. The average dollar win on a one-contract basis.
  3. The maximum dollar loss
  4. The volatility of the market as measured by the stop location. My stops are based on swing extremes. For this reason, the volatility are an automatic part of the stop calculation.

The process takes place over 4 steps:

Work out the units to determine the maximum loss. I do this by:

  • Avg$Win per trade/Avg$Win on a single contract basis. For example my Avg$Win per trade is $12K, and Avg$Win on a single contract basis is $1k. My units are 12k/1k = 12.
  • Multiply the units by 3 (as a buffer against a Black Swan). In this case, 12 x 3 = 36.
  • The Avg$Win per trade is the total profits/number of winning trades. The Avg$Win per trade includes the total number of contracts of every trade. The Avg$Win on a single contract is the average $ profit of all winning trades on the basis that each trade had only 1 contract.

2. Work out the maximum loss: calculate the mean and standard deviation of losses. Our loss should not exceed this figure. This is standard statistics. So, let’s assume that our mean is $9k, and the standard deviation is $3k. The maximum loss will be $9 + 3×3 = $27k. I normally round up to the next ‘5’ or ‘0’. In this case, the maximum loss would be $30k.

3. I then divide step (2) by step (1). In this case: $(30,000/36) = $833. Rounded up, this gives a maximum dollar loss of $850.00.

4. The $850 represents the Normal Position Risk and controls the normal position size. Let’s say our entry and stop show a risk of $400. This means we can take 2 contracts. If the risk is $1000, we would have to skip the trade.

The advantage of this approach is it utilizes our trading statistics. But it does have one drawback, it fails to normalize. By that I mean that it assumes, for example, that an $800 movement in the ES is the same as an $800 in oats. This is clearly untrue. I get around the problem by including in my stats normalization of results using the initiating trade price.

When I first did this, I struck two problems but I eventually solved them. Since the material forms part of the seminar material in August 2008, it would be unfair for me to disclose the problems and solution here. However, the process above is still better, in my view, than many of the position sizing algorithms currently available.


Important: Aussie Broker Retraction

An important announcement: In an ealrier blog, I made the statement that clients of FX brokers were protected in Australia against broker malfeasance. I have received advice that this is no longer the case. There is NO PROTECTION should a broker fail to segregate accounts. So there is no advantage opening an Aussie FX account.

The futures side may be better or worse than the US. As I understand it, the US position limits any claim to US$500K. The Aussie position is the maximum claim is A$100M. So if the total claims are less than A$100M, you will receive full refund; if the claims exceed A$100M, then we receive a pro-rata refund.

In these days of high volatility, I see my job as ensuring that I lose capital only because of my trading decisions. In doing this, I face two difficulties:

  1. Many brokers insist on keeping the base currency in US$. Given my view of the US$, I eliminate from further consideration this group.
  2. Now that the Aussie protection landscape has changed, I’ll be looking for a broker with a solid reputation that accepts a bank guarantee for margin. This way, my exposure is limited to cash funds I am prepared to lose in the event of broker malfeasance.

Risk Management 2

Yesterday I said that Money Management questions are dependent on:

  • The volatility of the market.
  • The trader’s Expectancy Return
  • The Ebb & Flow of the market relative to the trader’s trading plan.

Volatility of the market can be measured in any number of ways. For example:

  1. Perry Kaufman’s Efficiency Ratio
  2. Ray Barros’ Ray Clock
  3. ATR
  4. Barros Swing Extremes

The concepts of ATR and Barros Swing are useful in position sizing techniques. The ATR is used in the Turtles’ Position Sizing algorithm and I use the Barrow Swings in my own approach to position sizing – I’ll show how later. The Turtles formula is:

(% of Capital at Risk x Capital)/$ value of ATR = Normal Position Size.

Let’s now turn to Expectancy Return. We shall see how the Expectancy Return plays an essential role in the way I calculate Normal Position Size. The formula can be expressed in at least two ways:

(TotalProfit – TotalLoss)/Total Trades


(Av$Win x WinRate) – (Avg$Loss x LossRate)

I prefer the latter expression because it emphasizes the critical elements in expectancy: the AvgProfit/Loss and the WinRate/Loss Rate.

Finally we have the Ebb & Flow theory: I liken the trader’s plan to a beach front and the market as the waves that flow in and out of the beach. At times the waves will cover the entire beach. At those times we can do no wrong (a time of Flow); on other occasions, the waves will totally withdraw; at those times we can do no right (a time of Ebb); finally there are times (most often), when the beach is partially covered by the waves; at those times, we’ll lose some and win some.

This Ebb & Flow theory explains why newbies blow up. They start trading at a Time of Flow and continually increase their position size; the wave starts to withdraw but newbies fail to realize it, and maintain their aggressive position sizing. The ‘sometimes wins’ convince them that the aggressive position sizing is warranted. Finally the wave totally withdraws and they blow up.

Ebb & Flow plays an important role in my position sizing as we shall see tomorrow.

Risk Management

I hope everyone had a great Easter break!

We went for a weekend trip to ATIC Kuala Lumpur – a trip that has great lessons for trading. The early signs were not propitious.

We arrived at the airport and there was no transport; we arrived at the hotel expecting a non-smoking room with a king size bed and found we had been allocated smoking room with single beds. The events were like black swan events that hit our trading. But ATIC’s Peter and Noraine were there to sort things out – Peter arranged for the transport and Noraine sorted out the room issue. Peter and Noraine formed protective processes to ensure all went smoothly – they were like the processes and preparation in our trading that protect us.

In the next few blogs, I’ll be reviewing the process I call ‘risk management’. Risk Management has two components: money management and trade management. Money Management has two components:

  • a subjective aspect and
  • an objective one.

Money Management looks to answer four questions:

  1. Portfolio Risk: the maximum amount to risk at any one time on all open positions. This is a non-issue if you are trading only one instrument.
  2. Trade Risk: the maximum to risk on any one trade.
  3. Maximum Trade Exposure: the position size for a trade.
  4. Increase/decrease of Size: the process of increasing or decreasing position size.

In my subjective components are two factors. The first is what I call my risk profile. This tells me when I may be likely to breach my discipline. Usually this occurs when I have 6 consecutive losses and/or a greater than 10% loss; or when I have series of wins that accrue a greater return 15% return. I guess that’s what some call fear and euphoria. By knowing when the I am treading close to the line, I can take precautions against a breach of discipline.

The second subjective factor is my loss tolerance. All of us have a ceiling of what we can lose on any one trade and any dramatic rise in capital will impact on this. For example when I went from A$100M to A$250M, I found that I became too defensive and as a result, reduced my Expectancy Return. We can increase this level using the ‘boiling frog’ theory – incrementally increase our risk exposure to allow the desired level.

Objective factors are based on three ideas:

  1. Volatility of the market.
  2. Our Expectancy Return – average dollar win/average dollar loss; win rate/loss rate.
  3. The Ebb and Flow Factor.

In my next post I’ll consider each in detail.

Pot Pourri

 A mixture of everything tonight.

Interactive Brokers: I want to stress that my complaint was more about:

  1. The failure of IB to execute a stop order and
  2. The attitude of IB’s customer service that all was well in their world.

The fact is, it is not – at least not from my experience. The failure to execute a stop is a cardinal sin. And a refusal to accept that the system has a problem, despite evidence to the contrary,  is a danger waiting to explode.

I cannot lodge a complaint because I suffered no loss. Two students did – but  they failed to follow my advice to snag their orders and fills, so it would come down to their word against IBs.

I repeat here the advice I give all my mentor students: snag your order before you place; snagit after you place it and snagit after your fill. This way in the event of a dispute, you have some evidence to support your claim.

S&P: My view on this one was wrong. Yesterday you saw one reason why I won’t trade against the trend – the surprises are in favour of the trend. The rally on Tuesday did not catch me by surprise; the Monday low triggered a warning –  in Market Profile terms, there was no trade facilitation below 1270.

The magnitude of Tuesday’s rally did surprise me (notwithstanding the stimulus of more stoking by Bernanke and Company). With the strength of that rally in mind, I felt we’d pull back to the 50% level, 1319.75 basis ES M8, develop and then have another push up. But once the market accepted below 1319.75,  the preferred scenario had to give way.

So now, how? (As my Singaporean  friends would say).

I see a range developing between the 80-minute Primary Buy Zone (1268 to 1258) and the Primary Sell Zone (1340 to 1329). I’ll wait until after March 31st (window dressing over) before I develop any scenarios.

This plan will change if we see acceptance below 1270 and preferably below 1258 (basis March).

GOLD:  Figure 1 shows that despite the ‘top’, the 18-d uptrend is alive and well. The minimum target basis the perpetual contract is 925.30. Gold has an affinity for the 50% level so that may end up being the ultimate corrective low. One thing is certain, the correction will take time to unwind.

The lines are MIDAS support zones – see Nature of Trends and the free section of my site. (You can download the original articles).

Note that the present strong downmoves are characteristic of corrections following parabolic directional moves.



Crude Oil: Crude is not as clear as Gold. Gold’s strong correction is ‘normal’ in the light of the parabolic uptrend. But, the two strong days down in Crude (as shown in Figure 2) was not in keepieng with the overall profile. Crude Oil had just broken up and there was nothing to suggest the very strong down days were to come.

Crude Oil, for me, has all the hallmarks of a 13-w or 12-m correction which means the we’ll probably see an 18-d change in trend pattern. Let’s see what develops.


FIGURE 2 Crude Oil