Wednesday, 5 January 2011

Longer Term Trading and Today's Gap Trade in Detail

I promised to show you some of the longer term stuff I do. It's based on exactly the same methodology I use for day trading, but use different instruments in addition: ETFs and options as well as futures. I run the daily charts after the close of the U.S. stock market and sometimes when I get up early here in Europe.

The chart below is the ES daily. As you can see, FloBot, our auto trader, has signaled quite a few good trades in the last few months. The last trade was signaled at the close on 30 December, being a BUY. The algo that Flo uses for these longer term trades is almost identical to the day trading logic I use. Same logic over any market or time frame.

I got this signal and then had only to decide how I wanted to trade it. I had lots of choices including:
BUY the ES future
BUY a 1255 Jan CALL Option
SELL a 1255 Jan PUT Option
BUY a 1255/1265 Jan CALL Option Spread
just to name a few choices.

I don't have to make these complex decisions every time, as each of the choices has its distinct risk parameter. I have created a trading plan that takes into account context, and almost makes which way I enter a trade automatic. The context I look at is different to my day trades, as these trades last for a few days and I want to sleep not worry.

Each of the choices has not only a different risk profile, but the stop versus possible profits vary.

In this instance, the correct entry for me was to BUY a 1255 Jan CALL Option  around 16 points. I then saw them trade @ better than 26 points: a 10 point ($500) on a capital requirement of $5,000. I could have sold the 1255 PUT and made $450, but I bought the CALL as the volatility of the ES options are low. Buying the future would have made $750 per contract, but with a larger downside risk than buying the CALL. The risk with the CALL was that it was eroding (losing its time premium). Lots to think about, but plenty of time to do it as it's only once a day trading.

At about 10:10am (London time) I tweeted the Gap trade was setting up and that I would look to do something as RTH got closer. I was considering that the ADP Jobs prediction may have an impact. I was focusing on the bottom of the zipper of the RTH Profile of Dec 31st and the dual POCs of Dec 30th 24hr profile. That was my get out area if it looked like not bouncing. So I bought the bounce off my fav Fib @ 1257 with the CCI divergence. My scales were each of the EMAs and then just before the gap close. Price moved up before the ADP number, which was a good number as it turned out. My exits at the EMAs were both hit. Ching! Ching!

My last target for the final 1/3rd of the position was the top of the Keltner Channel. Doesn't always turn out this easy, as knife catching can be a sport that cuts more than just your hands. The structure and the plan were critical to taking and managing this trade. I was done and dusted before the RTH session even started.

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