(This is a continuation of a series on typical workflow, or how to best read and apply the analysis from Stops and Targets. I also posted an ‘ES Update’ entry earlier this morning)
I thought it might be interesting to take a closer look at Stops and Targets’ ES analysis page, to show how one can derive quite a lot of very useful information…
(click image to enlarge)
As I explained in a previous ‘workflow’ post, the first place I look is at the selected tab and in the example above I see that the multitrend tab has been automatically preselected by Stops and Targets. That tells me there has been a major event detected today, and so Stops and Targets is directing my attention to the multitrend overview tab for details.
Okay, so let’s have a look a little closer at the multitrend tab…
1) The multitrend rating is currently shown as ‘Bull 9’.
2) To see a detailed explanation of what that rating means, I read the first paragraph. Okay, that makes sense… after a strong rally from a deep pullback, ES is now back above all three primary trend lines. For now, at least, the bulls are back in command.
3) Next, I read the spotter paragraph and note that a bottom spotter was detected at 1252.75 on June 16th, and then confirmed at 1269 on June 20th and has advanced 3.6% off that low.
Confirmed spotters in Stops and Targets can often be very helpful to identify a change in momentum. As it turned out, this one nailed a change in character during an intermediate pullback–and non-S&T bears who are out there operating without that important piece of information missed the important clue and many of those guys continued to persist with the old paradigm and may have taken sizable losses as the range trade bottomed out.
4) Speaking of trading range, taking a look at the ‘trendicator’ text right under the multitrend graphic, I note that it says ‘trading range between 1260 and 1338.50’. Looking at my earlier post today, it becomes clear just how accurate that range bottom was, as ES double-bottomed at that line before starting this latest run higher.
The trendicator is an important part of the analysis page, and can tip off strategy subtleties between a ranging environment, where stops are run– and a trending environment, where we expect to see a series of stair-step movements in the direction of the dominant trend. Some of you may recall that the trendicator was indicating a bearish trend under 1295, as can be seen in this screenshot from June 16th when the bottom spotter was detected:
Once that trendicator switched to a range between 1260 and 1338, something important had changed, and as we can see now–that something was the setting of the bottom spotter.
(Mea Culpa: I am as guilty as the next guy of occasionally trying to ‘help’ an analysis system along, and I started second-guessing the 1338.50 top of that trading range as being perhaps ‘too high’, and so I started anticipating what I thought might narrow the range to fit my thesis, and that was the daily close line of interest at 1288 mentioned yesterday. No biggie in the grand scheme of things, but just another illustration of how a human analyst, with biases and outside influences, just isn’t a match for a computer when it comes to tactical strategy generation.)
5) The next place I look is to see what timeframe is ‘in play, and Stops and Targets points me to the intermediate tab, which is also marked by a green up arrow on the tab to show the dominant trend and direction at a glance. So, I click on the intermediate tab and start reading carefully…
6) The first paragraph tells me everything I need to know about the trend within the trend, including what to do with any previous positions and warnings about volatility.
7) Next I read the ‘Intermediate Trade Setup’ paragraph and note that ES is presently in the ‘ideal buy zone’, which is spelled out in detail as being between 1297 and 1311.25. Within that zone, the gain to risk ratio is 3:1, or better, and Stops and Targets tells me exactly where a trailing stop should be placed to stay within that extremely important risk management envelope. In the example above, the minimum initial stop placement is at 1278.50, for a max initial risk of 19 points, or about 1.46%. The targeted upside gain is at 1354.25, which is a potential gain of 56.75 points, or about 4.37%. The potential gain divided by risk = 3:1
Now, that target is a long way away, and we do have a range top that is lower than the target, but those things tend to work themselves over time. There is an intermediate trade here, but it is not without risk, and in this case that initial risk is 19 points, or 1.46%, which is reasonable for an intermediate position, but many traders won’t be willing to place a stop that wide, and that is why many of them get constantly stopped-out on entries. Each trade setup carries a potential gain and a potential risk, along with a requisite ‘ante’ to play the hand. That is probably one of the hardest things for some traders to learn–but risk management is the key to successful trading, and is what the pros live by– and what their prey, the amateurs, consequently die by.
Note: The futures don’t have a position-sizing tool (because of leverage) but for those with Stops and Targets’ equities analysis option, anytime there is a potential trade within the ideal entry zone, a position-sizing tool becomes available, which can be explored in depth at the following link:
There is no such thing as a ‘risk-free’ trade, and so the idea is to identify the possibilities, define the potential gain, and then calculate the maximum risk. Only the individual trader can determine what his/her risk appetite parameters are, and position-sizing becomes extremely important to make sure that the inevitable losses never are allowed to grow beyond a predetermined percentage of portfolio size.
Strangely enough, the bane of many self-guided traders is actually not allowing a trade enough leeway to become established. Impatience, coupled with fear and greed, are the demons we all fight. In the example above, a trader had to ask himself if he was willing to initially risk 19 points to potentially make 56, and if he was willing to give the trade weeks to months (intermediate time frame) to potentially play out.