Breakout trades review and more thoughts …

 

Let’s review the past posts briefly for the 5 minute breakout system.

We started with a 5 minute chart with only price and volume, then we made an assumption that we will wait for the first 5 minutes to see what market does.  We would then market this high and lowrom 9:30 AM EST to 9:35 AM EST, that would be our break out range.

At the close of the first 5 minutes, if the market breaks up we would take a long trade. If the market broke down below the low of the range we would take a short trade. Our stop would be at the opposite side of the 5 minute range.

Next, we looked at using ATR to get a clue on volatility so we can have better stops.  We also talked about using no more than 1-2% of account as risk in any trade as long as it was greater than the minium ATR for the pit session.  We also talked about having a max loss limit of 6% of your account in a day.

For example if you had $10,000 in your future account, you would risk either 1-2% or an amount greater than the minium average ATR.

How to use ATR to figure out a stop based on volatility: http://stockguy22.com/2012/10/01/monkey-trades-stops-thoughts/

Finally, we talked about market context and how it can help you pick entries and stops.  We talked about using the previous day’s high, open, low and close, then we added the globex high and low.  This gave us 6 price levels to watch for our current trading day.

We talked about using a longer time frame to guide you to entries and exits. We also talked about being aware of incoming economic events and data, as well as other notable news events prior to the day.

We also talked about having a trading plan and I gave an example.  We also talked about having a set of goals.

I want to talk about some assumption that we make using technical analysis.

Technical analysis assumes the following:

  1. Market action discounts everything: Any outer influence on the market is reflected in price as soon as the market is aware of it.
  2. Prices move in trends: Price might move up, down, or sideways. Once a trend is established from random price movement, price is likely to continue in the direction of the trend until an external force opposes it.
  3. History tends to repeat itself: We will assume that traders will make similar decisions to what they made in the past, this is the basis for chart patterns.

Sounds pretty straight forward, right? It really is that easy and all these wondrous indicators and and charts are all made from these 3 simple assumptions.

The truth is the market is much more complex, but by making a few basic assumptions we are able to reduce the amount of variables needed to analyze a trade.

The trading technique I introduced you to in the previous posts is called an opening range breakout. It is defined by 2 components – time and price. Time is typically 30 minutes, however since we aren’t trading in the 30 minute timeframe there is no reason to use that long a duration. Price is the high price and the low price made during the time of out open range.

We talked about one technique for trading the 5 minute breakout. The initial breakout above or below the range assumes that there will some continuation in the direction of the breakout. It is agressive and if correct you are able to catch the day’s move at the earliest point.

The other technique which I briefly alluded to was the trade the retrace back to the breakout to test it as support or resistance. If that level holds then typically there is a trade for continuation.

I also made light about using that same range throughout the day and buying or selling secondary breakouts. We also talked about ‘fading’ or reversals, for this introduced the topic of candle wicks, and if the price is rejected on the breakout, there is a good opportunity to take a position in the opposite direction.

When we talked about exits, I really made the 5 minute breakout so we were scalping high probability trades. This means we get a good entry but might miss a large amount of the move if it continues. But we also get the benefit of making a lot of small trades at a very high probability of success.

I also talked about how stops are not targets, they are preventative measures to keep your account from exploding in glorious flames. Stops should also be used to protect profits, I was not specific on how to trail the stop up.

Much of trading comes from experiencing the market every day for a long period of time. This time gives you the ability to experience a wide range of trending and non-trending days with vary volatility.

I told you that I watch for reversals every 0.25% move in the market. In many ways that 0.25% dictates my exit. Markets never really move over 2% unless its a event driven move, so this 0.25% keep me in check and looking at the total move. Many time we might run 1% or more, but retrace later in the trading day. It also keeps my expectations for a trade realistic, you cannot just ‘pie in the sky’ an exit and assume its going to work.

You can develop you own exits to fit your personality and trading style. Maybe if price retraces a certain amount you exit. Maybe if price moves a certain amount you exit. The important part is to keep it realistic and logical given the current volatility in the market and how the context of the market is working with or against you.

When we talked about the trading plan and risk management, we also talked about knowing how the instrument trades. Some instruments are driven by other factors and dont respect this trading style. The only way to see if your chosen stock or instrument will work is to test it over a period of time.

There are many nuances that you learn while trading. For example, take a look at volume and see if you notice and patterns when the market makes highs or lows. Do you notice a change in volume versus the average?

Increases in volume show that there is some trade there between buyers and sellers, a sort of battle if you will. If you combine a spike in volume followed by candles with large wicks, what could that mean?

We also didn’t talk about the different day types as they are better explained when I cover some things about market profile. It should be obvious that range bound days will require different trading skills than trend days.

Let’s review some charts for today.

Remember we always start with the longer timeframe. I have marked levels that I think are important on the 15 minute chart.

I always market Globex high and low of the overnight. As you review this chart try to ask yourself why I marked those white areas.

15 minute YM

Next lets look at the 5 minute. I marked the opening range.  If we had used our 5 minute breakout strategy – we would have taken a long and had plenty of time to exit.

If we would not have exited its likely that we should have gotten stopped out on the woosh down.  This was a news driven event and these trades are the momentum runner that you will eventually get comfortable trading.

Even if we didn’t catch the top of the woosh – one could have bot the retrace, and stopped.

Or sold the break down and caught a lot of downside very fast.

I can honestly tell you that having a room of traders helps me immensely someone always picks up on whats happening and I only have to worry about reacting.  AAPL was weak, but managed to pull of a nice bounce, the markets did not agree. If you trade the /NQ, you better be watching AAPL, since you are trading it by proxy.

5 minute YM

 

Put the levels from the  15 minute chart on the the 5 minute.  what do you notice?  What price did the market discount the news to?  Wow, having a plan helps.

I should tell you that many times when something like this happens, the rest of the day is a waste. I waxed my wife’s corvette today.  Try telling your boss at work when the shit hits the fan that you’ll be back at 4pm because the rest of the day is going to be boring. :D

I’ll post the more charts of futures and some stocks, be sure to look then over and tell if if its worth trading an opening range strategy.  5 minute breakout ranges are marked.

 

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