AAR & TOL 02 (Nov 08 - Jul 09)

[kennynah]

hi w :

thanks for asking....and below are my unprofessional views.

1stly, this trade setup is for intraday, as such, it is played out within a trading day, not an overnighter position...this is because index futures can be very costly. eg /ES is usd50 per point per contract. a 10 pt move on ONE contract will make or cost usd500 and after a while, traders go for > 5contracts per trade...

2nd, whether to trade this gap up or down, is dependent on a few parameters. One such parameter is the preMarket volume of these index futures. eg. /YM is e-mini DOW futures (we see them all at the top of Huat's page) starts trading actively 1.5 hours before cash market opens, and during this period, it opens for business by 9pm singapore time. for 1.5 hours, it reacts to all sorts of news, both economic and industrial. just like the cash index, we can also obtain the volume traded on such future indexes.
generally, if the volume is NOT high but the future index ticker shows a meaningfully large gap, then it is likely not sustainable during cash market environment. one reasoning of a low volume, is that that futures gap is emotions based trading.

3rd, gap trades must have stop loss and this order CANNOT be compromised. if a trader cannot accept this in a disciplined way, it is best not to trade gap plays. there's no guarantee that gaps are filled, although some literature will suggest that ~ 80% of gaps are eventually. since there's always the possibility of failure, the trader MUST set up a stop loss order as soon as the opening position is filled. it is also suggested that a target exit is entered (OCO order)

4th, if both cut loss and target profit stops are unfilled by 430am (all US index futures temporarily stop trading 15mins after cash market closes at 515am), the trader should conscientiously close off the opened position. as i've mentioned, futures trading can be very costly. /YM is $5 per 1 point. we have seen up to 800 points movements in a day and to be caught on the wrong side, is a usd4K loss just on ONE contract. any gap in the wrong direction, the next day, can be devastating....GTC stop limit orders may not get filled at all. so, stop limit orders CANNOT work on subsequent gaps. O/N is therefore very dangerous.

5th, if gap play is intended, entry price is subjective...some traders will use PIVOT points. S1,S2,S3, R1,R2,R3 are all marked clearly on the 5mins chart to help determine also exit and stop loss points. personally, i have not used Pivot points. I normally either look at Bollinger Bands, or 200MA/500MA on 5 mins chart to see where the resistance and support are...hence, if the gap price is in the middle of the bollinger band (daily chart), or between MA10/50 (daily chart), then the setup is not there for the trade


hear from you more on this...thanks..

[winston]

Hi K,

Thanks for your kind comments.

1) Yes, I seldom carry forward my positions to the next day

2) I dont normally look at Pre-Market Volume. Thanks for this great tip.

3) What % do you use for the Stop-Loss ? I have been cutting at about 5% or half my position when things are going against me.

4) What is your Target Exit ? Is it based on Support and Resistance or do you used a certain percentage, say 20% ? I have been using Psychology. When things are too good to be true, it's time to get out

5) What happens if there is no gap at the opening ? What % move in a certain diirection do you deem it to be a trend for the day ? For this one, I use Support and Resistance. If it is not big movement in a certain direction, I normally sit out.

Thanks for your kind insights. I have learnt something very useful today.

Take care,
Winston

[kennynah]

boss.... i learnt more from you incessant postings all these months..i shd thank you instead

we were discussing a particular setup for a trade...ie gaps... so, all these above is one flavour of trading a gap up/down situation...all of us will have some form of mechanism to it...

as for me...if i take a gap trade...the cut loss and profit target will usually be 1:1 risk/reward... so, say /YM gaps up to 8700 on MOnday night and I decide to play it...and if my Short entry is 8750...and i choose to cut loss at 50 points, then my stop out will be 8800 and my target profit will be 8700.... now, that maybe my money and risk mgt portion...then, i will see where the resistances and supports are and see if that 50 pts make sense...else, i either adjust or if i am uncomfortable...i opt to forgo the trade...

i usually use exact dollar amounts to predetermine where my cut loss point is.... rather than %

[helios]

i usually use exact dollar amounts to predetermine where my cut loss point is.... rather than %

why use exact $? precision?

Ken ge is very detailed, thanks in advance.

[winston]

Thanks K.

You have a very good point. I have been conditioned to think about 1:2 or even 1:3 risk / rewards for my trades. As I'm really trading very short term on gaps, I should lower them to 1:2.

Need to reflect more, Homework for a cold Sunday morning

Take care,
Winston

[kennynah]

san mei mei.... zao an (find husband)

exact $$ bcos that's just easier for me... but for same %, it is different in $$ value for diff position size...ie 5% of 1K is not same as 5% of 10K...

in the end, i am looking at my account in terms of actual $$ and cents...rather than %... but i may one day, if my mama store allows me to pay 1.2% for that packet of malboro menthol lights....

[kennynah]

I have been conditioned to think about 1:2 or even 1:3 risk / rewards for my trades. As I'm really trading very short term on gaps, I should lower them to 1:2.

there's a way to deal with a 1:2 or more risk/reward ratio...but that likely requires scaling out the opened position...eg... 50 points is max loss...but target is set at 100 points for a 1:2 risk/reward ratio...

then, this maybe what i'll do...

#1 : stop limit order cut loss at 50points in wrong direction
#2 : 1/2 position close off at 50points in the favoured direction
#3 : remaining 1/2 close off at 100points in favoured direction

if #2 is filled, #1 could be adjusted as one has booked 1/2 the profits

in this manner, one can consider > 1:1 risk/reward ratio scenario....

[helios]

san mei mei.... zao an (find husband)

in the end, i am looking at my account in terms of actual $$ and cents...rather than %... but i may one day, if my mama store allows me to pay 1.2% for that packet of malboro menthol lights....

WHAT?!

Husband cannot any how find or trade ... at the end of day, you got to practise 'Value Investing' on finding husband ... And finding someone who has established at materialistically and worldly levels is very different from someone who is still establishing, & the bottomline is whether he will have the faith level ...

can you ask your mama store on 'Contra Value' lor ... ho ho ho ...

[kennynah]

W : we may have a potential gap up tonight for the US indexes.... a possible setup play ?

[winston]

Thxs K. There was a gap in HK with high volume. I did not buy a Put . Unfortunately, I did not manage to buy a Call either