In our last email we showed you how to use small stops and still not get stopped out frequently.
Now that you know how to use small (Logical) stops without getting stopped out frequently, you will want to know how to still be able to take trades even in today’s high volatility conditions.
Today’s markets (especially the indexes) have been much more volatile than usual. This has been going on periodically for the past year or more.
Markets prefer stable conditions to remain efficient and easy to trade. Economic and political gridlock have aggravated these conditions substantially, making it much more difficult to achieve consistent results.
The political landscape in Washington DC has been in turmoil for the past few years. Not only has it been difficult to get much meaningful legislation passed, but the lack of political harmony and efficiency has made trading more problematic.
This is not to be confused with the steady climb of the S&P, NASDAQ or the Dow, whose ascent is primarily due to their largest members, particularly the so-called Big Four: Amazon, Apple, Facebook, and Google. Mid-cap and smaller companies have not fared so well.
Compounding this has been the Covid 19 pandemic for the past year, resulting in major shifts in the economy and many bankruptcies.
So how does the small retail trader navigate this minefield?
If you are a position trader, the deck is stacked against you, particularly if your time horizon extends beyond several days or a few weeks. It is very difficult to achieve consistency in this environment as a swing trader.
Although it is inherently easier for the day trader to be more consistently accurate than a swing trader due to the shorter trade span of (typically) minutes, this can be offset by the turbulence caused by increased volatility and uncertainty.
To deal with this challenge you must first have a true mechanical trading system rather than a series of loose rules or discretion-based entries. Having clear-cut steps with specific conditions that must be met before an order is placed for entry reduces uncertainty and creates true consistency.
Assuming you are trading an actual mechanical system, you would want your entries to be based on parked orders instead of chasing the market. By using a stop limit order you eliminate slippage and force the market to prove itself by trading through your resting order to initiate the trade.
When do you park the order? That depends on your trading system’s requirements. Assuming they have been met, do not wait for your set up bar to close before parking your stop limit order. That may be too late, and the market may trade beyond your order’s potential price point before you manage to get it placed.
If you are using time-based charts, e.g., a one minute chart, use the countdown timer that is typically available in day trading platforms to gauge when the close of your setup bar is imminent.
Your best compromise is to wait for the final three or four seconds before the bar closes. You should already have your cursor at the exact spot for your entry price, whether it is placed directly on the chart or if you are using a DOM. This reduces last-moment mousing around and increases your accuracy and timing.
Many day traders use tick-based charts instead of, or in addition to, time-based charts. Because tick-based charts have no element of time there is no linear way of gauging when your set up bar is about to close.
Instead, you will want to monitor the order flow of ticks for that bar by using the tick counter which behaves similarly to that of the time-based counter on your one minute chart.
Because there is no way of knowing how many ticks will be in the next trade, you will have to watch how rapidly the counter approaches zero. For example, if you are using a 144-tick chart, the counter may start at 144 and then the next reading might show 96, followed by 82, then 50, then 16, and finally zero.
This is a reflection of how many ticks were traded each time the counter updates itself. Therefore, the counter’s readout can update slowly when the market is not very active, or in a highly volatile market you could see it jump literally from 144 to 0 in a split second.
Your best bet is to gauge how rapidly the order flow is proceeding and park your order well before it shows zero on the counter. For the indexes in a ‘normal’ market condition, a recommended level to park your order is when the counter reaches approximately 15 ticks before zero. It is much more difficult to gauge when you have volatility. You may need to park your order as much as 25 or more units before the counter might reach zero.
This means that you are taking a ‘best guess’ approach based on the order flow itself since there is no absolute way of reliably anticipating when your setup bar will be closing.
This means that you will miss some trades. You may also get into some trades with higher risk than you had planned on because your setup bar may have increased in range after you parked your order and before it closed.
These are the realities of trading in a volatile market like we have today. You need to pick your battles. Do not feel that you have to succeed in taking every single trade set up that you see. It is much more important that you pass on potential trades that could cause damage to your account. As always, capital preservation comes first.
Despite these caveats, well-designed mechanical systems like the TradeSafe System have remained consistently profitable, even during these volatile conditions. If you practice common sense and use the recommended techniques described above, you will be able to enter trades more safely and consistently than any discretionary approach.
Stay tuned for next week’s installment to learn more about support and resistance can interfere with trade follow-through and profitability.
To learn more about TradeSafe, please click HERE
To watch a Replay of a recent online workshop about the TradeSafe Mechanical System, please click HERE