Tag Archives: tactics

S&P500: trade comments with hindsight

Yesterday the S&P500 (SPX) had a strong trend day offering good trade signals. Even though I don’t trade the SPX I think that a brief analysis helps to understand how these trade signals work. I know that “hindsight is exact science” but rule-based trading method wouldn’t fall too far from visionary trade examples.

Trade signals:
Entry signals are provided by countertrend micro trendline breakouts with the trend indicated by the EMA20.
Short entry:
The bar breaking the pullback’s trendline is the signal bar. First entry is taken below the low of the signal bar. Second entry is taken at the low of the bar that has a higher low following the first entry bar. On the following charts I labelled first entries with 1 and second entries with 2.
Stop loss:
Initial stop at the top of the signal bar but not smaller than 1.5 points which is roughly 1.5 times the average true range of the last 200 bars (5 minutes). The logic behind limiting how close you put the initial stop is that an intra-bar pullback followig the breakout may kick you out of the position just before the price would move into profit.
A short position is closed above the highest high of the last two bars prior the current bar.

1. The first signal came two hours after the open with an initial risk/reward of slightly better than 1:1 (measuring to the previous price extreme as a target). Exit signal came 11 bars later with a 4.60 pts profit. The second entry also offered a profitable trade with slightly less gain but the risk/reward was still close to 1:2 ex post after the price reached a new low. The small gap lower after the signal indicates that the entry was hard to execute without a few ticks slippage therefore the second entry was a safer trade to take.
2. The second trade offered an better risk/reward (nearly 1:3) while the second entry had a bit less profit. Should have been a pretty straight-forward trade to execute while two bars with long lower tail were giving an early warning for taking profit.
3. Trading the third signal would have been a bit tricky. While the first entry was not looking very decisive the the second entry was nearly at the same price level. Moreover the bullish bar after the first entry would have trapped out most of the traders entering short on the breakout so the second entry again had a better chance. I have to admit that after that long bullish trend bar against the setup taking out the high of the previous three bars I would have hesitated entering short.
4. The fourth trade had a nice signal with a bearish pin bar touching the EMA20 with a long bearish trend bar for the entry. One can argue that the pin didn’t break the micro trendline but the position and form of the setup bar was convincing enough in my view.

To sum it up, it was a study book example of a trend-from-the-open day with four trades with two of them require some discretionary judgement. I don’t think that there is problem with that. As long as there is a sound position management is place (i.e. stop loss) an experienced trader can trust his/her own gut feelings. As Al Brooks writes in his book, “close enough is good enough” when evaluating a pattern.

Entry tactics

Let’s say you see a firm signal on your intermediate timeframe and you are to decide to enter the market. Will you place a limit order? Or a stop entry? What would be the trigger price? Let me go through the option that I have in mind when I am about to enter the market.

1. Stop-entry

The first and most obvious way to enter a position it to place a stop order a few pips beyond the signal bar in the direction of the signal. This is the most aggressive method one can use in my opinion however this the easiest that can get tricked by the market. Also when you decide to place a stop entry it leads to the question, how far you have to put the trigger level so your order will not get activated by a false movement. In my experience 2-3 pips is not a safe distance which cannot get triggered by institutional trader who are gunning for stops.

2. Use prior high/low for entry level

It is similar technique but more conservative as it waits that the price undercuts the previous swing point. It lets some pips slip away but also lets the market to gain some momentum in the trades direction.

3. Hook entry

This method comes from Joe Ross and requires quite some patience as the main point is to wait for a the first failure of a price-bar to make a higher high or a lower low in the trades direction. The the previous bar’s extreme point would be the entry trigger. Again, this method has more slippage but lowers the number of false entries.

4. 50% signal bar entry

This method provides the best entry price but may not get you in the position as the price often doesn’t pull back but takes off and never looks back. (Of course with ‘never’ I mean the reasonable timeframe of the trade.) It operates with a limit order placed at the half of the signal bar’s range therefore it reduces the number of pips that are risked. The downside of this method is that it often gives a premature entry when a stop order outside of the signal bar’s range would have not get triggered.

Which method to use is the trader’s own discretion and judgment. Of course one can always tell which should have been used after the trade was done… but traders have to make decision at the “hard right edge” of the chart.