Monday, June 11, 2012

Monday Evening


ES (Sep) Daily
ES (Sep) Hourly w/Fib
ES (Sep) 30min

Monday afternoon



After determining that a potential trade has an acceptable risk level, we also need to figure out whether the possible reward is worth the risk.

What is the possible reward ?
In other words, if the trade moves in our favor, how far is it likely to go ?  Absent a shock of some sort, stocks tend to move between support and resistance.  One way to pick an initial target is to locate a point just inside the next level of support or resistance.  The distance between that point and the entry is the “likely reward”.  The potential reward could be much greater, but in this step just figure out what’s probable.

Is the likely reward worth the risk ?
Unless you have a really high batting average (say 70% +), it seldom makes sense to take a trade which has more risk than the probable reward.  The lower your batting average, the greater the possible reward needs to be relative to the known risk.  A lot of traders (myself included) like to have at least a 2:1 reward / risk ratio before taking a trade.  At that rate, you only have to be right half the time or less to be profitable over time.  A 3:1 or higher ratio is certainly desirable.

Profit = Gains - Losses
Profit = ( %wins * average win ) - ( %losses * average loss )

So, for a 55/45 hitter with 2:1 reward / risk average
Profit = ( 0.55 * 2 ) - ( 0.45 * 1 ) = ( 1.1 - 0.45 ) = 0.65 risk unit profit per trade, over time

(this is the expectation formula.  I will likely revisit it in the future, and it will be on the final exam, lol)

Monday Morning

Gator's Chart of the Day: SP-500
Well it looks like Spain is saved (for the moment) and China had some strong trade numbers.  As I write this on Sunday night the futures are up about 16 points.  If that holds it will put the open right on the lateral resistance line (green arrow) and that is what I expect to see; resistance.  The upper Bollinger band and the 50 day simple moving average are just above that level so even if we clear the lateral line it looks like that's as high as we can expect the average to move in the near term.

There are likely to be a lot of shorts that need to cover so keep your eye on the opening rotation (first 20 to 30 minutes) and when the red candles start to show on the 2, 3, and 5 minute charts you may want to take some profits.  Watch for support to be established on the pullback and we should see a new trading range. 

We have a quadruple expiry week so expect lots of volatility and next weekend Greece will make another attempt at selecting a government.  I plan to be very heavy in cash by Friday evening.  Good luck.