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My Trading Plan


Here's a 'detailed' explanation of my trading plan. Please tell me what you guys think of it.

Foreword: The whole thing is based off of the theory that if something is profitable beyond a reasonable area of slippage and errors (such as computer problems) then it will likely be profitable for at least the near future. It's also based off the theory that the market will likely move at least 2 points in either direction from the open in any day before making any huge moves. (The exception to this is a trend day.)

Background: I back-tested this system starting January 1st 2010 and found that it is profitable by 72 points as of this writing.

How it works:

I look at the open price compared to the close of the previous day and decide whether to trade towards the close or away from it. I make this decision minutes before market opens at 9:30 and take a position at as close to open price as possible (usually slippage means one or two tick difference). I then set a 2 point target and 10 point stop and I don't do ANYTHING until either one is hit, at which point my day is done.

Please leave ANY questions of feedback. I've live traded this for almost all of May now and it has been profitable. I am looking for validation, especially from the people with years of experience because I don't know if I'm on the right track or not.
A 10 point stop can wipe out a lot of 2 point gains... I included todays chart that colors a 2.5 point range from the opening price, I use this on a 3 min when I trade the open. I've read that on the open floor traders tend to push the ES a couple points for their own trades. What factors do you consider when deciding to go long or short? Above or below the 50% retracment/midpoint of the overnight session? Do you look at a tick chart for overnight trends, & supp/resis price levels?

Something to keep in mind, in Larry Pesavento's book "The Opening Price Principle" he says the open will be very near the low or high of the day 70% of the time. Read Bruce's pitbull thread.
Click image for original size
snapshot 2
The probabilities have worked out so far that you win more than 80% of the time so you still net positive despite the massive stop.

I look at overnight and look at how big the difference is between the open and close, the shape of the overnight candles, and how volatile the markets have been recently (with most emphasis placed on the first).

I only use 30 minute charts with no indicators.

Originally posted by staylor455

A 10 point stop can wipe out a lot of 2 point gains... I included todays chart that colors a 2.5 point range from the opening price, I use this on a 3 min when I trade the open. I've read that on the open floor traders tend to push the ES a couple points for their own trades. What factors do you consider when deciding to go long or short? Above or below the 50% retracment/midpoint of the overnight session? Do you look at a tick chart for overnight trends, & supp/resis price levels?

Something to keep in mind, in Larry Pesavento's book "The Opening Price Principle" he says the open will be very near the low or high of the day 70% of the time. Read Bruce's pitbull thread.
Click image for original size
snapshot 2

Oops i meant more than 5/6 times...basically enough times to net positive. 80% would net negative since 4 wins for ever 1 loss would net -2 points per 5 trades.
Staylor

The floor traders or "Locals" play the role of a go between for the retail and institutional traders. They amass the small contracts into a bundle size that the institutions would be interested in.

For playing this role they are given two advantages, one is that they never have to pay the spread, they always get the best price and two their orders are filled immediately they don't have to wait in line like the rest of us.

I'm sure that like the rest of us they want to make as much as they can on a trade, but I've often wondered if instead of pushing the price like you say that its not just a matter of them having to purchase more small lots at higher or lower prices in order to make a bundle of enough size that they can then turn around and sell it to an institution.

For example: The floor trader has amassed 70 contracts at a very decent price, but needs 30 more to make 100 so he now becomes willing to pay a higher price for those 30 (driving price higher) yet still allowing himself a nice profit when selling the 100.

It's probably a little of both. Anyway these are just things my mind ponders when my mind wanders.


Feng,

My question to you would be how long could your account survive if you were to run into a long string of consecutive losses?

This becomes an important issue when dealing with a 10 to 2 R/R ratio. If someone is well capitalized then yes they could weather the storm, but someone with a small account could not resulting in utter devastation.

It doesn't matter how well something has performed in the past its the future we need to worry about and design our money management around worse case scenarios.

I am sure you have already considered this. I am stating this for someone that may not have.
The answer to that question depends entirely on how large your account size is.
Originally posted by feng456

Here's a 'detailed' explanation of my trading plan. Please tell me what you guys think of it.

Foreword: The whole thing is based off of the theory that if something is profitable beyond a reasonable area of slippage and errors (such as computer problems) then it will likely be profitable for at least the near future. It's also based off the theory that the market will likely move at least 2 points in either direction from the open in any day before making any huge moves. (The exception to this is a trend day.)

Background: I back-tested this system starting January 1st 2010 and found that it is profitable by 72 points as of this writing.

How it works:

I look at the open price compared to the close of the previous day and decide whether to trade towards the close or away from it. I make this decision minutes before market opens at 9:30 and take a position at as close to open price as possible (usually slippage means one or two tick difference). I then set a 2 point target and 10 point stop and I don't do ANYTHING until either one is hit, at which point my day is done.

Please leave ANY questions of feedback. I've live traded this for almost all of May now and it has been profitable. I am looking for validation, especially from the people with years of experience because I don't know if I'm on the right track or not.


feng, if you don't mind, what was your trade today with this plan?
I went long with entry fill 1 tick above opening price. Target hit no fill 2 minutes later. Finally exited 2 points above at around 10:15 EST. Stop was 10 points as usual.
If I were to summarize your strategy it is to scalp a quick profit during opening price volatility. As long as you do not get on the wrong side of a trend off the open, the 2 point profit target should be easily reached.

My first thought is a 10 point stop & 1:5 R:R ratio on what is essentially a very short term scalp trade is excessive. This raises the question in my mind, is there a better way to protect your account for this trading strategy ?

One option that comes to mind is to use a time/volatility stop rather than an arbitrary hard 10 point stop. What I mean by this is use say the first 5 minute bar high and low as your stop. So for example if you go long at the open, then you would put your stop a couple ticks outside the low of the 5 minute bar you just entered as soon as that bar closes, (using this technique you have to wait for the bar to close first before placing the stop order). If a 5 minute bar stop is not statistically valid, then use the first 10 minute bar. This would tighten up your stop considerably and give some statistical basis to your stop strategy, while at the same time would protect your account balance from a breakaway trend against your position off the open.

This raises the next question, which is based on the same line of reasoning, why use an arbitrary fixed 2 point target ? The current average daily range of the ES is currently just over 30 points. Do a study of the current average range of the opening 30 minutes over the last 30 days, you will find it is significantly wider than 2 points. Also there is a tendency in the ES for the first 30 minute candle to have a full body. With this information, you could change your profit objective to capture more of the range of the first 30 minutes. Perhaps enter at the open of the first 30 minute candle (based on your analysis) and exit at the close of that same candle. Combine this with the 5 or 10 minute bar stop strategy to protect against a breakaway trend against you. I think a simple volatility based exit strategy like this would significantly improve your R:R and profitability. Yes you will give up a little bit on your win%, but your overall profitability and expectancy numbers will be greatly improved, not to mention lowering your risk of ruin probability.
Um yes and no. Its designed to take advantage of volatility period without being stopped out from too much volatility.

That being said I will test out your idea over the weekend and see how that works out in the back-testing.

Originally posted by pt_emini

If I were to summarize your strategy it is to scalp a quick profit during opening price volatility. As long as you do not get on the wrong side of a trend off the open, the 2 point profit target should be easily reached.

My first thought is a 10 point stop & 1:5 R:R ratio on what is essentially a very short term scalp trade is excessive. This raises the question in my mind, is there a better way to protect your account for this trading strategy ?

One option that comes to mind is to use a time/volatility stop rather than an arbitrary hard 10 point stop. What I mean by this is use say the first 5 minute bar high and low as your stop. So for example if you go long at the open, then you would put your stop a couple ticks outside the low of the 5 minute bar you just entered as soon as that bar closes, (using this technique you have to wait for the bar to close first before placing the stop order). If a 5 minute bar stop is not statistically valid, then use the first 10 minute bar. This would tighten up your stop considerably and give some statistical basis to your stop strategy, while at the same time would protect your account balance from a breakaway trend against your position off the open.

This raises the next question, which is based on the same line of reasoning, why use an arbitrary fixed 2 point target ? The current average daily range of the ES is currently just over 30 points. Do a study of the current average range of the opening 30 minutes over the last 30 days, you will find it is significantly wider than 2 points. Also there is a tendency in the ES for the first 30 minute candle to have a full body. With this information, you could change your profit objective to capture more of the range of the first 30 minutes. Perhaps enter at the open of the first 30 minute candle (based on your analysis) and exit at the close of that same candle. Combine this with the 5 or 10 minute bar stop strategy to protect against a breakaway trend against you. I think a simple volatility based exit strategy like this would significantly improve your R:R and profitability. Yes you will give up a little bit on your win%, but your overall profitability and expectancy numbers will be greatly improved, not to mention lowering your risk of ruin probability.
Ok I just backtested from March 11th to April 15th using the following method suggested by pt_emini:

method 1: 1 point above/below 5 minute bar (wick and all) as a stop with target being 30 minute close (even if negative)

method 2: 1 point above/below 10 minute bar (wick and all) as a stop with target being 30 minute close (even if negative)


Results:

method 1 netted 1.25 points ignoring slippage

method 2 netted 0.25 points ignoring slippage


During the same period using the arbitrary 2 point target 10 point stop would've netted about 22.75 points.

The time interval was chosen randomly.
the specific criteria data ur looking..of course noone else here has done backtesting for it. something u need to spend time doing urself.

gaps are good though at fading. just gotta find something that works and be disciplined enough to follow it.