All trades of this swing were called live on twitter @stealthsurf
17th Dec – SPT Spirent
17th Dec – SMDS Smith DS
18th Dec – HWDN Howden Joinery
18th Dec – SMP St Mowden Properties
18th Dec – WTB Whitbread (stopped today 24/12/14)
To keep the math simple I’ll use a £10,000 account again. Take a look at my guide to winning big & losing small so you can see how I load trades.
Account Size = £10,000
First Entry Risk = 0.5% (£50)
I will use Spirent as my example this time. Out of the five trades entered this was the riskiest setup. I almost closed the trade but then it sprang to life just as I was putting the order in. This is a good example of my worst idea outperforming my best idea or sods law as it’s more commonly known.
Here is the daily setup. It actually moved up on an upgrade on the 11th Dec and this is why I thought it was my riskiest idea. Upgrades rarely continue in the direction you want them to go.
You will also note the gap fill and falling 5 month sma so I have a limit target area for when I’m adding to my position if it follows through to the upside.
Now what I’m waiting for after this burst of activity is the range to narrow or squeeze as they call it. I like to use the 3 day range (on the intraday chart it is marked in grey). For two days after the range expansion it was about 10 points. On the 16th the range started to narrow and on the 17th it had halved or you could say it was a 100% squeeze.
I entered my first position on the 17th as we had already had a higher low/high combo on the 15min chart and we had a great squeeze. My entry was at the 5 day sma and I waited for a 15min candle to close up. I put my stop just under 2/3rds of a retrace of the previous move.
First entry @ 71.1
Stop at 69
Position = 2381 Shares
Risk at Stop = 0.5R or £50
Second Entry @ 73.25 as it traded above the 3day & 30min opening range
Stop @ 71.1 below the opening range locked in breakeven from first position
Position = 930 Shares (we risked 0.25% of account))
Risk @ Stop = £25 (minus any slippage on a gap down)
So I’ve added 930 shares and lowered the risk from 0.5R to 0.25R if it reverses.
Third Entry @ 74.5 as it traded above the 3day & 30min opening range
Stop @ 71.8 below the opening range and around breakeven on the previous two entries.
Position = 556 Shares (we risked 0.16R)
Risk @ Stop = £16 (minus any slippage on a gap down)
So I’ve added another 556 shares and the risk is lower still 0.16R if it reverses.
Now I still don’t have my full position loaded because of the stop distance due to the wide opening range but the next day we get a tight opening range where the top of the range is also the high of the previous day and also the 3 day range breakout area. All three together with a tight stop. Remember if price trades above these levels there is no reason it should trade back below the low of the day unless a reversal is going to happen. So…we are right and we make multiple R on the trade or we are wrong and we move on.
Fourth Entry @ 74.75 as it traded above 3day & 30min opening range and previous days high. I actually missed the first pop as I was doing the math.
Stop @ 74 below the opening range locking in £67 from the previous three entries.
I risked half my locked in profit on this setup £33
Position = 4400 Shares
Risk @ Stop = +£34
So I’ve added another 4400 shares and have locked in £34 if it reverses.
I now have more than a full position running but I only risked 0.5R on the first position and lowered my risk on the second & third positions. My fourth position locked in some profit and had huge potential to hit a close 2R target.
I now have a 2R target on my last position of 76.4 that is closer than my second and third additions. Entry one has a 2R target of 75.5, so my two biggest entry’s have achievable 2R targets.
Spirent moved up through the day and I had a target on my biggest position at 76.7 and because I was holding more than a full position size I thought it wise not to take overnight risk so I did the math.
I have five open swing trades. If I can get 5R out of this trade it would help the overall account by guaranteeing my targets of risking 1R to make 2R or more and being right half of the time. Three of the other trades are locking in profit also so this would be a great result to close the year on. I always look at risk this way. Trailing on one to offset open risk on another. Keeping total account heat to a minimum and if possible locking in a gain as soon as I can.
5R target for the trade was around 76.7 and I’m out for 76.8. Yes I left 3R on the table as I write this but that’s that. I now delete Spirent from my watchlist and move on.
Here is the math for four different methods of profit taking and trailing.
Stop out at 74 = £28 or 0.56R
Take profit at biggest positions 2R target =£251 or 5R
Trailing as of 24/12/2014
Take 1/3rd profit at last positions 2R and trail the rest = £141 or 2.82R
Trail under the opening range locks in today = £110 or 2.2R
There is no right or wrong way of building trades but for me locking in gains and reinvesting them or locking in gains and lowering risk when adding are the most powerful way to build multiple R winners and limit losers.
I lowered my risk on every entry as the price moved in my favour. You will notice I bought the high on every addition. I could have waited for a retrace after the entry signal but that just means you will miss all the best moves that don’t retrace.
I’ve used this example as it’s the best trade out of the five entered as of now. I have just been stopped out of my Whitbread trade on the close for about 2R. So that puts the closed trades on this market swing at 7R and divide that by 5 trades averages 1.4R a trade. I have three trades running of which two are locking in gains.
I will add this again from my “Win Big & Lose Small” tutorial as this is the reality of trading.
The aim is to be right “big” and to be wrong “small.” You will get stopped out of trades at breakeven after a couple of positions are entered and sometimes the market will take you out at your first entry but that is normal. When the market does move with all your positions entered it becomes a very powerful technique. It’s the exact opposite of averaging down. We’ve all seen how quick people lose money when they average down. Do the opposite. The math doesn’t lie.
The best reward to risk is found in tight daily or weekly price action or squeezes.
Narrow ranges can only expand.
Waiting to buy on a retrace will in most cases keep you out of all the strongest moves.
Using Indicators for oversold or overbought on this setup will give the opposite signal and keep you out of the winning direction.
All moving averages get broken. Just because a setup is below a 20dma doesn’t mean a thing.
Scaling out of winning trades before 2R destroys your expectancy.