Execution Techniques & TradeManagement Tools Linda Raschke, LBR Group NY Traders Expo, 2008 Execution Techniques and Trade Management Tools The Relationship Between Entries, Exits and Stops [email protected] LBRGroup.com 2/27/2008 Copyright (C) LBRGroup 19971997-2008 2 Trading is about location and timing. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 3 Traders want an edge in knowing when and where to enter and exit trades. ? 2/27/2008 Copyright (C) LBRGroup 19971997-2008 4 PROBLEM: A single tool, such as an indicator, does not always identify a high probability trade opportunity. ? 2/27/2008 Copyright (C) LBRGroup 19971997-2008 5 Market Profile Concepts + #2 .Technical Analysis Charting 2/27/2008 Copyright (C) LBRGroup 19971997-2008 6 .SOLUTION: Combine conceptual with analytical techniques. #1 . Your ability to process data on a timely basis (tape reading skills) will also improve as you gain in experience. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 7 .Market Profile can help teach market structure and show data in a “conceptual” type of format. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 8 .. Technical Analysis indicators can help identify when and where. Building a Solid Market Foundation! #3 – CONFIRM (Indicators / Oscillators) #2 – WHEN (Volume Charts or discretionary tape reading) #1 – WHERE (Market Profile Charts) Market Understanding 2/27/2008 Self-Understanding Copyright (C) LBRGroup 19971997-2008 9 . A general comment about the relationship between Entries. It’s all about the exit strategy! The larger the target. the fewer times the stop will be hit (all else being equal). the higher the % win rate. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 10 . with time based stops. The smaller the target. and Profits z z z z z z There is not always a relationship between a trade is entered and where a trade is stopped out. For example. the stop out level has no relationship to the initial entry price. The wider the stop. Stops. the lower the % win rate. It’s not necessarily the entry that makes a model or system successful. When we can detect the presence of the “higher time frame player”. we can use trailing stops and manage a trade differently.MARKET PROFILE CONCEPTS Market Profile is a way of organizing data. When the market is starting to come into balance. It is a tool for putting the current trading environment into a context. “There is no greater indicator of what the market is doing then the market itself.” 2/27/2008 Copyright (C) LBRGroup 19971997-2008 11 . activity and structure. a trader will do best playing for small wins or scalps only. Definitions and concepts for understanding the market z z z z z z Initial Balance – the first hour’s range Range Extension – move outside of the first hour’s range Value Area – 70% of the day’s activity level Single Print Buying Tail – one time frame price rejection at the lower end of the range (30-minutes) Single Print Selling Tail – Also considered to be a form of “excess”. Tails cannot occur in the last time frame of the day. Point of Control – where the most amount of activity takes place. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 12 . Classic Market Profile chart with Value Area 2/27/2008 Copyright (C) LBRGroup 19971997-2008 13 . Selling Tail 2/27/2008 Copyright (C) LBRGroup 19971997-2008 14 .Overlapping value areas. Market Profile Value Areas with Expanded Profile 2/27/2008 Copyright (C) LBRGroup 19971997-2008 15 . range expansion or momentum readings. limit orders or buy and sell stops for trade initiation? Let’s review some basic market profile concepts to create a framework for understanding how urgent the trading environment is. Traditional means of measuring this include volume.How URGENT is the market environment? z z z Should a trader use market orders. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 16 . z A trader must recognize the implications and adopt countertrend trading strategies for the remainder of the day. and the rest of the day is spent testing back and forth in this range. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 17 .Six different Day Types – 1) “Normal Day” z Initial Wide balance in first hour. Despite the early range is wide. despite the name. This type of day often occurs on news where the initial directional move is strong. support or resistance is found off the initial drive. z Normal days are actually rare. Normal days and Tails – detail 2/27/2008 Copyright (C) LBRGroup 19971997-2008 18 . z The initial balance or base is upset as the other time frame player pushes price out of the first hour’s range. z The rest of the day is then spent forming a new value area outside of the early base.2) – “Normal Variation Day” z This type of day does not have as wide a first hour’s range as a normal day. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 19 . z Each time frame makes lower lows and lower highs (or. 4) .“Trend Days” – Standard and Double Distribution z One direction movement fueled by high volume. z The “other” time frame player is in control from the opening price. and instead has a narrow initial balance. This is an urgent environment. vice versa).3). z A double Distribution trend day lacks the strong opening drive. Single prints then market the move out of the initial value are and the other time frame player remains firmly in control. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 20 . Drive outside Narrow Initial Balance 2/27/2008 Copyright (C) LBRGroup 19971997-2008 21 . “Non-trend Day” z A Non-trend day has no directional conviction. Market participants balance their positions in front of the event. and minimal activity level. z The is no market conviction and little market participation.5) . 2/27/2008 Copyright (C) LBRGroup 19971997-2008 22 . z This type of day often occurs before a big news release or economic event. no range extension. z This type of day tends to form a broad “value area” or trading range. Price continues to rotate on both side of the opening price.6) – “Neutral Day” z The market tests on both sides of the initial balance. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 23 . A breakout from this range must be accompanied by an increase in volume to indicate that the other time frame player has gained control. z Both the buyers and the sellers are active but no one is in control. Neutral Day – no conviction 2/27/2008 Copyright (C) LBRGroup 19971997-2008 24 . z Let’s review some of the types of actions that can take place off the opening.OPENINGS z An increase in volume or range expansion is our first clue that there might be a more “urgent” trading environment. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 25 . the prices tests in one direction and then sharply turns around and drives in the opposite direction. Open – Test – Drive: After the market opens. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 26 . Open – Rejection – Reverse: The opening is outside the previous day’s value area – the move outside value is rejected and the market reverses sharply back into the previous day’s range.OPENINGS z z z z Open Auction: Price rotates around the opening without any clear conviction. Open Drive: Prices moves in a strong directional manner right from the opening. Gap outside value area 2/27/2008 Copyright (C) LBRGroup 19971997-2008 27 .Open – Rejection – Drive. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 28 . followed by a neutral day. and then another open-drive.Bonds – trend day and drive off opening. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 29 . Volume confirms the trend. play for small targets only.A market that is “out of balance” demands urgent entry. When there is lighter volume. Opening relative to a previous day late afternoon move. and further upside continuation should be expected. if the price drops below the previous day’s value area. z If the market has a move outside of value area in the afternoon with a weak or strong close. then it can be assumed that the higher time frame player was stepping in. If the market holds above the previous day’s value area in the early AM session. z Recognizing the presence of the higher time frame player is such an important concept! 2/27/2008 Copyright (C) LBRGroup 19971997-2008 30 . this can either be short covering (in case of up close) or. the higher time frame player stepping in. However. then the late afternoon move was nothing more then short covering by day traders. followed by unusual reversal bar 2/27/2008 Copyright (C) LBRGroup 19971997-2008 31 .SP – classic trend day down. Same market action shown by 30-minute candlestick charts 2/27/2008 Copyright (C) LBRGroup 19971997-2008 32 . EC – market profile 30 minute – rising value areas in trend 2/27/2008 Copyright (C) LBRGroup 19971997-2008 33 . EC – mark up (“Single Prints”) 2/27/2008 Copyright (C) LBRGroup 19971997-2008 34 . Market Profile – Big Picture 2/27/2008 Copyright (C) LBRGroup 19971997-2008 35 . 2/27/2008 Copyright (C) LBRGroup 19971997-2008 36 .Market Profile expanded into 5 minute intervals with volume. Classic Trend Day with elongated profile 2/27/2008 Copyright (C) LBRGroup 19971997-2008 37 . Volume as a confirmation/non-confirmation tool 2/27/2008 Copyright (C) LBRGroup 19971997-2008 38 . Take the offer 2/27/2008 Copyright (C) LBRGroup 19971997-2008 39 .Buy at Market. Join the Bid. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 40 .Most platforms offer multiple methods for trade management. A short term moving average has a lower high in a downtrend. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 41 . Let’s use a sell stop to pull us into a trade. Bracket your trades – Buy stop above/OCO/Buy limit below 2/27/2008 Copyright (C) LBRGroup 19971997-2008 42 . 2/27/2008 Copyright (C) LBRGroup 19971997-2008 43 .“OCO” or Bracket Functions can be entered contingent upon an initial fill. or after the trade has been executed. Sell Limit placed at previous resistance area 2/27/2008 Copyright (C) LBRGroup 19971997-2008 44 . Tighten your stop to cinch in profits 2/27/2008 Copyright (C) LBRGroup 19971997-2008 45 . Tighten stop to lower end of previous range 2/27/2008 Copyright (C) LBRGroup 19971997-2008 46 . Sell OCO – Sell Limit and Sell Stop in case the limit is not filled Ec1.lnk 2/27/2008 Copyright (C) LBRGroup 19971997-2008 47 . Now use “OCO” for Exit and trade management 2/27/2008 Copyright (C) LBRGroup 19971997-2008 48 . The Trendlines show entry and exit for this EC scalp 2/27/2008 Copyright (C) LBRGroup 19971997-2008 49 . Trailing Stop Functions z ONLY should be used at specific structural points! z Breakouts. and after A-B-C formations in a trending market 2/27/2008 Copyright (C) LBRGroup 19971997-2008 50 . Trend reversals as defined by the wave structure. Keltner Channels on a 5 minute chart 2/27/2008 Copyright (C) LBRGroup 19971997-2008 51 . Volatility Stops z ATR = Average True Range z 3 ATR +/.highest high or lowest low of last 10 bars z 3 ATR +/. 2/27/2008 Copyright (C) LBRGroup 19971997-2008 52 .moving average of close. high or low. DAILY CRUDE – VOLATILITY STOP 2/27/2008 Copyright (C) LBRGroup 19971997-2008 53 . daily chart. ATR trailing stop 2/27/2008 Copyright (C) LBRGroup 19971997-2008 54 .BEANS. .The End! Thanks for Attending. lbrgroup.528.3250 CME Group 800-331-3332 312-930-1000 [email protected] 888.com 312.Contact Information Linda Raschke www.com [email protected] .LIMITDN MF Global www.mfglobal.