Raschke Execution Techniques
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Execution Techniques & Trade Management 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
SOLUTION: Combine conceptual with analytical techniques. Your ability to process data on a timely basis (tape reading skills) will also improve as you gain in experience. #1 - Market Profile Concepts + #2 - Technical Analysis Charting
2/27/2008
Copyright (C) LBRGroup 19971997-2008
6
Market Profile can help teach market structure and show data in a “conceptual” type of format.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
7
. Technical Analysis indicators can help identify when and where.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
8
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, Stops, 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, with time based stops, the stop out level has no relationship to the initial entry price. It’s not necessarily the entry that makes a model or system successful. It’s all about the exit strategy! The larger the target, the lower the % win rate. The smaller the target, the fewer times the stop will be hit (all else being equal). The wider the stop, the higher the % win rate.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
10
MARKET PROFILE CONCEPTS Market Profile is a way of organizing data, activity and structure. It is a tool for putting the current trading environment into a context. When we can detect the presence of the “higher time frame player”, we can use trailing stops and manage a trade differently. When the market is starting to come into balance, a trader will do best playing for small wins or scalps only. “There is no greater indicator of what the market is doing then the market itself.” 2/27/2008
Copyright (C) LBRGroup 19971997-2008
11
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
Overlapping value areas, Selling Tail
2/27/2008
Copyright (C) LBRGroup 19971997-2008
14
Market Profile Value Areas with Expanded Profile
2/27/2008
Copyright (C) LBRGroup 19971997-2008
15
How URGENT is the market environment? z z
z
Should a trader use market orders, 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, range expansion or momentum readings.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
16
Six different Day Types – 1) “Normal Day” z
Initial Wide balance in first hour. This type of day often occurs on news where the initial directional move is strong. Despite the early range is wide, support or resistance is found off the initial drive, and the rest of the day is spent testing back and forth in this range.
z
Normal days are actually rare, despite the name.
z
A trader must recognize the implications and adopt countertrend trading strategies for the remainder of the day.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
17
Normal days and Tails – detail
2/27/2008
Copyright (C) LBRGroup 19971997-2008
18
2) – “Normal Variation Day” z
This type of day does not have as wide a first hour’s range as a normal day.
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.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
19
3), 4) - “Trend Days” – Standard and Double Distribution z
One direction movement fueled by high volume. This is an urgent environment.
z
The “other” time frame player is in control from the opening price.
z
Each time frame makes lower lows and lower highs (or, vice versa).
z
A double Distribution trend day lacks the strong opening drive, and instead has a narrow initial balance. 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
5) - “Non-trend Day” z
A Non-trend day has no directional conviction, no range extension, and minimal activity level.
z
This type of day often occurs before a big news release or economic event. Market participants balance their positions in front of the event.
z
The is no market conviction and little market participation.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
22
6) – “Neutral Day” z
The market tests on both sides of the initial balance. Price continues to rotate on both side of the opening price.
z
Both the buyers and the sellers are active but no one is in control.
z
This type of day tends to form a broad “value area” or trading range. A breakout from this range must be accompanied by an increase in volume to indicate that the other time frame player has gained control.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
23
Neutral Day – no conviction
2/27/2008
Copyright (C) LBRGroup 19971997-2008
24
OPENINGS z
An increase in volume or range expansion is our first clue that there might be a more “urgent” trading environment.
z
Let’s review some of the types of actions that can take place off the opening.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
25
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. Open – Test – Drive: After the market opens, the prices tests in one direction and then sharply turns around and drives in the opposite direction. 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.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
26
Open – Rejection – Drive, Gap outside value area
2/27/2008
Copyright (C) LBRGroup 19971997-2008
27
Bonds – trend day and drive off opening, followed by a neutral day, and then another open-drive.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
28
A market that is “out of balance” demands urgent entry. Volume confirms the trend. When there is lighter volume, play for small targets only.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
29
Opening relative to a previous day late afternoon move. z
If the market has a move outside of value area in the afternoon with a weak or strong close, this can either be short covering (in case of up close) or, the higher time frame player stepping in. If the market holds above the previous day’s value area in the early AM session, then it can be assumed that the higher time frame player was stepping in, and further upside continuation should be expected. However, if the price drops below the previous day’s value area, then the late afternoon move was nothing more then short covering by day traders.
z
Recognizing the presence of the higher time frame player is such an important concept!
2/27/2008
Copyright (C) LBRGroup 19971997-2008
30
SP – classic trend day down, followed by unusual reversal bar
2/27/2008
Copyright (C) LBRGroup 19971997-2008
31
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
Market Profile expanded into 5 minute intervals with volume.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
36
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
Buy at Market, Join the Bid, Take the offer
2/27/2008
Copyright (C) LBRGroup 19971997-2008
39
Most platforms offer multiple methods for trade management.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
40
A short term moving average has a lower high in a downtrend. Let’s use a sell stop to pull us into a trade.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
41
Bracket your trades – Buy stop above/OCO/Buy limit below
2/27/2008
Copyright (C) LBRGroup 19971997-2008
42
“OCO” or Bracket Functions can be entered contingent upon an initial fill, or after the trade has been executed.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
43
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, Trend reversals as defined by the wave structure, and after A-B-C formations in a trending market
2/27/2008
Copyright (C) LBRGroup 19971997-2008
50
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 +/- moving average of close, high or low.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
52
DAILY CRUDE – VOLATILITY STOP
2/27/2008
Copyright (C) LBRGroup 19971997-2008
53
BEANS, daily chart, ATR trailing stop
2/27/2008
Copyright (C) LBRGroup 19971997-2008
54
The End!
Thanks for Attending.
Contact Information Linda Raschke www.lbrgroup.com [email protected] 888.LIMITDN
MF Global www.mfglobal.com 312.528.3250
CME Group 800-331-3332 312-930-1000 [email protected]
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
SOLUTION: Combine conceptual with analytical techniques. Your ability to process data on a timely basis (tape reading skills) will also improve as you gain in experience. #1 - Market Profile Concepts + #2 - Technical Analysis Charting
2/27/2008
Copyright (C) LBRGroup 19971997-2008
6
Market Profile can help teach market structure and show data in a “conceptual” type of format.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
7
. Technical Analysis indicators can help identify when and where.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
8
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, Stops, 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, with time based stops, the stop out level has no relationship to the initial entry price. It’s not necessarily the entry that makes a model or system successful. It’s all about the exit strategy! The larger the target, the lower the % win rate. The smaller the target, the fewer times the stop will be hit (all else being equal). The wider the stop, the higher the % win rate.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
10
MARKET PROFILE CONCEPTS Market Profile is a way of organizing data, activity and structure. It is a tool for putting the current trading environment into a context. When we can detect the presence of the “higher time frame player”, we can use trailing stops and manage a trade differently. When the market is starting to come into balance, a trader will do best playing for small wins or scalps only. “There is no greater indicator of what the market is doing then the market itself.” 2/27/2008
Copyright (C) LBRGroup 19971997-2008
11
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
Overlapping value areas, Selling Tail
2/27/2008
Copyright (C) LBRGroup 19971997-2008
14
Market Profile Value Areas with Expanded Profile
2/27/2008
Copyright (C) LBRGroup 19971997-2008
15
How URGENT is the market environment? z z
z
Should a trader use market orders, 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, range expansion or momentum readings.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
16
Six different Day Types – 1) “Normal Day” z
Initial Wide balance in first hour. This type of day often occurs on news where the initial directional move is strong. Despite the early range is wide, support or resistance is found off the initial drive, and the rest of the day is spent testing back and forth in this range.
z
Normal days are actually rare, despite the name.
z
A trader must recognize the implications and adopt countertrend trading strategies for the remainder of the day.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
17
Normal days and Tails – detail
2/27/2008
Copyright (C) LBRGroup 19971997-2008
18
2) – “Normal Variation Day” z
This type of day does not have as wide a first hour’s range as a normal day.
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.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
19
3), 4) - “Trend Days” – Standard and Double Distribution z
One direction movement fueled by high volume. This is an urgent environment.
z
The “other” time frame player is in control from the opening price.
z
Each time frame makes lower lows and lower highs (or, vice versa).
z
A double Distribution trend day lacks the strong opening drive, and instead has a narrow initial balance. 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
5) - “Non-trend Day” z
A Non-trend day has no directional conviction, no range extension, and minimal activity level.
z
This type of day often occurs before a big news release or economic event. Market participants balance their positions in front of the event.
z
The is no market conviction and little market participation.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
22
6) – “Neutral Day” z
The market tests on both sides of the initial balance. Price continues to rotate on both side of the opening price.
z
Both the buyers and the sellers are active but no one is in control.
z
This type of day tends to form a broad “value area” or trading range. A breakout from this range must be accompanied by an increase in volume to indicate that the other time frame player has gained control.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
23
Neutral Day – no conviction
2/27/2008
Copyright (C) LBRGroup 19971997-2008
24
OPENINGS z
An increase in volume or range expansion is our first clue that there might be a more “urgent” trading environment.
z
Let’s review some of the types of actions that can take place off the opening.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
25
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. Open – Test – Drive: After the market opens, the prices tests in one direction and then sharply turns around and drives in the opposite direction. 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.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
26
Open – Rejection – Drive, Gap outside value area
2/27/2008
Copyright (C) LBRGroup 19971997-2008
27
Bonds – trend day and drive off opening, followed by a neutral day, and then another open-drive.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
28
A market that is “out of balance” demands urgent entry. Volume confirms the trend. When there is lighter volume, play for small targets only.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
29
Opening relative to a previous day late afternoon move. z
If the market has a move outside of value area in the afternoon with a weak or strong close, this can either be short covering (in case of up close) or, the higher time frame player stepping in. If the market holds above the previous day’s value area in the early AM session, then it can be assumed that the higher time frame player was stepping in, and further upside continuation should be expected. However, if the price drops below the previous day’s value area, then the late afternoon move was nothing more then short covering by day traders.
z
Recognizing the presence of the higher time frame player is such an important concept!
2/27/2008
Copyright (C) LBRGroup 19971997-2008
30
SP – classic trend day down, followed by unusual reversal bar
2/27/2008
Copyright (C) LBRGroup 19971997-2008
31
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
Market Profile expanded into 5 minute intervals with volume.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
36
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
Buy at Market, Join the Bid, Take the offer
2/27/2008
Copyright (C) LBRGroup 19971997-2008
39
Most platforms offer multiple methods for trade management.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
40
A short term moving average has a lower high in a downtrend. Let’s use a sell stop to pull us into a trade.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
41
Bracket your trades – Buy stop above/OCO/Buy limit below
2/27/2008
Copyright (C) LBRGroup 19971997-2008
42
“OCO” or Bracket Functions can be entered contingent upon an initial fill, or after the trade has been executed.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
43
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, Trend reversals as defined by the wave structure, and after A-B-C formations in a trending market
2/27/2008
Copyright (C) LBRGroup 19971997-2008
50
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 +/- moving average of close, high or low.
2/27/2008
Copyright (C) LBRGroup 19971997-2008
52
DAILY CRUDE – VOLATILITY STOP
2/27/2008
Copyright (C) LBRGroup 19971997-2008
53
BEANS, daily chart, ATR trailing stop
2/27/2008
Copyright (C) LBRGroup 19971997-2008
54
The End!
Thanks for Attending.
Contact Information Linda Raschke www.lbrgroup.com [email protected] 888.LIMITDN
MF Global www.mfglobal.com 312.528.3250
CME Group 800-331-3332 312-930-1000 [email protected]
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