Here is a short article on how one grey box day trading system analyzes and manages a trade. Stock trading systems are as numerous as traders, they can be created to trade or invest in any time frame from years to milliseconds and they typically take tremendous time, cost and effort to establish, prove and maintain. In other words, there is no easy money and one trader’s methodology is not necessarily appropriate for anyone else.
The following trading system example only seeks to profit from intra day moves in price. This system uses the symbol SPY (which ticks with the S&P500 futures) as a leading indicator and Camarilla floor pivots as support and resistance. Many of the system’s trade criteria are programmed to automatically give the trader alerts, so the job of the trader is to acknowledge and validate the alert, then employ experienced based techniques to time the entry or exit or wait for additional signals. This system also uses other techniques such as breadth indicators, tape reading, various chart time frames, RSI, volume, time and sales, line break charts and market phases. All of which would require too much discussion for this short article so they are skipped for the purpose of brevity. The purpose here is to highlight some main components used for one specific trade for that particular day.
Critical to the success of any trading system, the task of scaling in (adding shares) and scaling out (removing shares) is mentioned but not specific as to number of shares. This system uses “if”, “then” logic for all trade entries and exits. “If” multiple criteria are met, “then” a trade is considered. The more criteria that is met, the better the odds for a successful trade.
As seen on the 3 minute chart (MST) above, on Dec 30, 2009 symbol GS made a couple of moves which offered good day trade opportunities. The horizontal lines below #10 are Camarilla floor pivots (R4,R3,PP,S3) and the blue line above #10 is a simple support line drawn during a consolidation period while waiting for support confirmation. It was determined from other system techniques that a long trade (vs a short) was the correct side to be watching for the day so shorts were not considered.
- Both the S&P 500 futures (illustrated with symbol SPY) and GS opened the day on a positive note. The system says to allow the first 10-30 minutes of the session to pass while leftover previous day and after hours trades fill and to allow for early positioning for larger traders.The point at which the opening volatility will cease can vary but can be seen on the tape and chart. In this case it took about a half an hour.
- At point #1, GS retraced but quickly recovered as the futures continued higher. This also put GS in a position of breaking out of what is called the “first 15 minute range” (although this is just a guideline as the break can come at anytime). At #2 GS is moving higher with market support seen at #3. It also has volume and price support on the Camarilla pivot line between #1, #2. In addition to the system giving a buy alert the trader should be employing some basic tape reading to time the entry. It is rarely a good idea to buy into a price spike or surge. Tape reading experience and discipline say to wait for trading to roll over into the bid, dry up and back into a rising ask on volume before considering. Once an entry price is picked either a limit order can be used or market order if the spread is relatively tight. Because of the volatility of early morning trading the system says to start with light shares for the initial entry called an “anchor trade”.
- An anchor trade gets the trader a stake and commands attention for additional entries or exits. Entering a trade around point #2 gives the trade an acceptable albeit slightly risky, risk:reward ratio of 1:2. With the stop loss set just above the pivot line on top of #1 the projected upside is to the upper Camarilla line above #8. It is also known from experience GS can offer a much larger move in either direction so the additional risk can be taken with light shares.
- The futures start to roll over around #4 , however GS demonstrates price support on Camarilla R3 which is the line above #2. This tells the system that GS is relatively strong in comparison to the futures and if it holds that range during a weak market phase then any continued move up in the futures could become a boon for GS.
- As we approach #5, the futures seem to find some support and print higher 3 minutes closes. As the volume picks up and GS breaks to new daily highs additional shares are added to give an average price just below the support line at #5. As the average price is moved up, so is the stop loss. It can not been seen here but as the stop is moved up in relation to the average price the risk:reward ratio actually improved to be closer to 1:3. As suspected, the futures strength was enough to fuel more buying in GS and it breaks through the initial target at #8 and toward point #9. During this run, the trade was scaled out and some profits were taken during the break at #8 and a small position was held through the next consolidation and price/volume run up illustrated by points #10/#12. It would have been reasonable to add shares on the new high of day (HOD) at #10 but additional shares were not considered due to the impending lunch phase.
- After the second consolidation and wave higher #13, the system exits the position due to the fact we are in the lunch phase. The 5 market phases (open, pre-lunch, lunch, post-lunch, close) are a key part of this system and are considered a major component for the success of this system. Since no additional entries alerts were triggered, GS was not traded for the rest of the session.
The above article and chart illustrates some key components of one system for how a trade can be accomplished. As mentioned above there is much more to this system, that is required to trigger this system’s buy or sell alerts. Additionally, the Camarilla pivots mentioned were not traded in this instance as the “floor pivot” textbook defines how these pivots should be traded. This was done deliberately as the system considers that all indicators used are on a case-by-case and day-by-day basis. Therefore, if one were to take what is published here and trade it as a complete system without the other components and requisite experience, it would probably lose money.
For more information on this system and others or to talk trading, please contact the Bill.