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Strategies & Market Trends : E-Mini Pit -- Ignore unavailable to you. Want to Upgrade?

To: Brandon who wrote (10389)	4/28/2003 2:35:25 PM
From: Brandon	Read Replies (2) \| Respond to of 11288

Here is a class I gave in my chatroom some time ago about trading with the data I provided in my prior post. Brandon 18:05:55 <Brandon> class will be fairly informal tonight 18:05:58 <Brandon> the first thing I want to do 18:06:23 <Brandon> is to make sure that you understood the key points I made today about 2b tops and bottoms 18:06:29 <Brandon> and change of trend criteria's 18:06:39 <Brandon> if you have any questions about this at all please ask 18:08:11 <David> I'm a bit curious about fading a small gap. 18:08:21 <Brandon> ok 18:08:23 <Brandon> let me get that info 18:08:41 <Doc> How about a quick review on 2b tops & bottoms. 18:08:46 <David> I've been trying to come up with some way to profit from the small ones, since they are likely to fail. just don't have a good setup for 'em 18:09:08 <Brandon> ok on the gaps 18:09:15 <Brandon> lets look at the nasdaq comp 18:09:37 <Brandon> the average gap is about 1.2% 18:09:40 <Brandon> in either direction 18:10:22 <Brandon> and 71% of gaps will fill 18:11:04 <Brandon> but once you start to deal with gaps that are twice as large as the average gap 18:11:10 <Brandon> then the odds of them filling are less and less 18:11:21 <Brandon> and the smaller as compared to an average gap a gap is 18:11:25 <Brandon> the more likely it is to fill 18:11:42 <Brandon> I think I could clarify that if you guys ask some questions 18:11:48 <Brandon> coz I understand the data 18:11:50 <Brandon> and Im going hmm 18:11:55 <Brandon> what the hell did you just say 18:11:59 <Brandon> so please ask questions here 18:12:07 <David> lol... how do I turn that into CA$H MONEY!!? 18:12:13 <Brandon> ok 18:12:16 <David> it's the setups that stump me 18:12:20 <Brandon> lets say you have a gap of 1.1% 18:12:26 <David> I can tell it should close, but I can't get in 18:12:27 <Brandon> this is in the area of an average gap 18:12:40 <Brandon> you know that this is a typical gap 18:12:44 <Brandon> and in all instances of gaps 18:12:48 <Brandon> 71% of them fill 18:13:01 <Brandon> so what would be the prudent action? 18:13:14 <David> fade it somehow 18:13:30 <Brandon> ok 18:13:38 <Brandon> so what should we look for? 18:14:03 <David> I'm thinking momentum in the closing direction but so little room to move 18:14:10 <Brandon> lets include globex data in this 18:14:19 <Brandon> what could you look for? 18:14:30 <Brandon> lets assume we are gapping up for arguments sake 18:14:31 <Doc> S/R 18:14:35 <Brandon> since most gaps are up gaps 18:14:40 <David> ahhh, you'd look for flags, bases or any of that 18:14:48 <Brandon> key moving averages 18:14:54 <Brandon> both in the ND and the NQ 18:14:58 <Brandon> in the key time frames 18:15:13 <Brandon> those being daily, weekly, 120minute, 60minute, 30minute, 15minute and 5 minute 18:15:18 <Brandon> you can start with those 18:15:22 <Brandon> 20,50,200 18:15:30 <Brandon> I would consider all these to be key moving averages 18:15:42 <Brandon> so lets assume for the sake of example 18:15:47 <Brandon> that our gap is 1.1% 18:16:08 <Brandon> and in the ND (if you don't have ND (Full CME data) use the QQQ) 18:16:19 <Brandon> this gap is to the 15 minute 20ma 18:16:34 <Brandon> not right on the MA 18:16:37 <Brandon> coz those are tricky 18:16:40 <Brandon> but 3 points under it 18:16:46 <Brandon> and there is prior price support which broke 18:17:01 <David> so short the break stop over the MA, right? 18:17:09 <Brandon> say 5 points overhead 18:17:20 <Brandon> and our gap is 1.1% 18:17:31 <Brandon> so using today's data that is a gap of 12 points 18:17:41 <Brandon> how would you approach this 18:17:55 <Brandon> lets use real numbers 18:18:00 <Brandon> today's close is 1073 18:18:15 <Brandon> and tomorrow we gap to 1085 18:18:26 <Brandon> the prior support is at 1090 18:18:38 <Brandon> and the MA is at 1088 18:18:49 <Brandon> this gap has a 71% chance of filling 18:19:07 <Brandon> filling=touching 1073 18:19:25 <Brandon> so we all agree we are looking to short correct? 18:19:33 <David> yup 18:19:42 <Brandon> when do we short? 18:19:52 <David> short near 88ish, stop over 90ish? 18:20:06 <Brandon> id short the open myself 18:20:14 <Brandon> 1085 18:20:18 <David> right at the bell? 18:20:18 <Brandon> and Id be on the phone 18:20:22 <Brandon> right at the bell 18:20:34 <Brandon> why? 18:20:51 <David> if it doesn't climb at all your still in 18:21:00 <Brandon> ok 18:21:07 <Brandon> but also I know that ill be right 18:21:10 <Brandon> or at least that 18:21:11 <Brandon> over time 18:21:16 <Brandon> ill look like a smart person doing it 18:21:22 <mike35> risk reward is 2.4 to 1 18:21:24 <Brandon> as long as I can have a reasonable place to put my stop 18:21:40 <Brandon> what's a reasonable place to put our stop? 18:21:48 <Brandon> we are now short 1085 18:21:55 <David> over the MA at 90 18:21:57 <Brandon> we have $50,000 in our account 18:21:59 <Brandon> so we are short 5 18:22:30 <Brandon> ok the price resistance at 90 18:22:32 <Brandon> how much over it? 18:22:54 <David> .5 - 1 point unless it's just a few contracts that trade there 18:23:04 <Brandon> you can do that 18:23:06 <Brandon> but the open 18:23:11 <Brandon> even if its a fake 18:23:15 <Brandon> you will have more than a few 18:23:24 <Brandon> one thing I tend to find on the open 18:23:31 <Brandon> is that they like to overshoot by about 2.5 points 18:24:03 <Brandon> so stop placement? 18:24:21 <David> 92.5 ish 18:24:35 <Brandon> ok 18:24:44 <Brandon> so should we risk 7.5 points 18:24:46 <Brandon> our gap is 12 18:24:51 <Brandon> and has a 71% chance to fill 18:25:00 <mike35> yes 18:25:05 <Doc> Yes 18:26:07 <Toni> B will brb.. he has to reboot 18:26:40 <David> another question, B for the exit on our example... do you put the cover order in above the target? 18:29:46 <Brandon> ok so we have decided for the sake of this example 18:29:50 <Brandon> that our risk is 7.5 18:29:54 <Brandon> and that the gap is 12 points 18:30:08 <Brandon> and this is an acceptable trade given that we have the moving average 18:30:13 <Brandon> and the price point slightly overhead 18:30:17 <Brandon> and our stop is right above this 18:30:46 <Brandon> Right as I was leaving I saw David ask if we should put the buy stop in a bit less than the full 12 points 18:30:47 <Brandon> yes 18:30:48 <Brandon> I always do 18:30:51 <Brandon> in this case 18:31:02 <Brandon> Id look for 10.5 to 11 points on the trade 18:31:37 <David> thanks B, good stuff 18:31:45 <Brandon> ok now moving on 18:31:48 <Brandon> we take the trade 18:32:01 <Brandon> and the market gods want to see if we love them today 18:32:17 <Brandon> so 18:32:19 <Brandon> after we enter 18:32:24 <Brandon> things start out looking ok 18:32:31 <Brandon> but soon 18:32:44 <Brandon> they figure they have to take a leak, and we happen to be standing underneath them 18:32:53 <Brandon> so the NQ trades up to 1095 18:32:55 <Brandon> we stop out 18:33:05 <Brandon> lost 8 points because of slippage 18:33:10 <Brandon> now what do we do? 18:33:19 <Brandon> the odds still say that we have a 71% chance to fill that gap 18:33:28 <Brandon> it doesn't say that we cant stop out first 18:33:38 <Brandon> but it does say this gap will probably fill 18:33:45 <Brandon> so what do we do? 18:33:55 <Brandon> put on the rain coat right? 18:34:14 <David> lol, that and look for another setup like selling under the bottom of the up bars during the rally? 18:34:26 <Brandon> any excuse to short 18:34:27 <Brandon> right 18:34:28 <Brandon> 2b's 18:34:32 <Brandon> double tops 18:34:39 <Brandon> exhaustions moves 18:34:44 <Brandon> high TICKs 18:34:45 <Brandon> divergence 18:34:47 <Brandon> bear flags 18:35:26 <Brandon> ok now 18:35:41 <Brandon> as I said the average gap is just under 1.2% in the Nasdaq 18:36:07 <Brandon> some are more 18:36:08 <Brandon> some are less 18:36:14 <Brandon> the greater the gap 18:36:18 <Brandon> the greater the odds it WILL NOT FILL 18:36:29 <Brandon> the less the gap from the average the greater the chance it will 18:36:41 <Brandon> with me on this? 18:36:45 <David> yup 18:36:59 <mike35> y 18:37:07 <lee1> y 18:37:54 <Brandon> now lets go to gaps of double 18:38:00 <Brandon> these occur fairly rarely 18:38:23 <Brandon> and 64% of these will remain UNFILLED 18:38:46 <Brandon> now lets look at gaps of 3% or more on the open (up or down) 18:38:51 <Brandon> these are even more rare 18:39:07 <Brandon> they are about 6% of all gaps 18:39:37 <Brandon> 77% of 3% gaps go UNFILLED on the day of the gap 18:39:45 <Brandon> what does this tell us? 18:40:11 <David> lean with those not against 18:40:22 <Brandon> now we get to gaps like yesterday 18:40:26 <Brandon> 4% or greater 18:40:59 <Brandon> between 1997 and Dec 31 of 2001 these comprised 2.4% of all gaps 18:41:32 <Brandon> and remained unfilled on the day of the gap 95% of the time ( I think 2 of them filled in the study) 18:41:43 <Brandon> and in the cases when they did, all hell broke loose to the downside) 18:41:56 <Brandon> now also 18:41:59 <Brandon> on 4% gaps 18:42:13 <Brandon> the average range gain or loss for the day after a 4% loss 18:42:16 <Brandon> from close to close 18:42:19 <Brandon> is 7.9% 18:42:31 <Brandon> so this should tell us something too yes? 18:42:45 <David> on those days, press your edge until you puke! 18:42:58 <Brandon> right 18:43:04 <Brandon> it tells you that on about 1% of the trading days 18:43:19 <Brandon> (the 4% gaps occur 1 to 3 times a year) 18:43:32 <Brandon> you should press the hell out of your edge 18:43:46 <Brandon> why wouldn't you 18:44:04 <Brandon> 2 times since 1997 it resulted in significant pain 18:44:08 <Brandon> and even in those cases that it did 18:44:11 <Brandon> if you reversed 18:44:14 <Brandon> you would have been ok 18:44:20 <Brandon> but that would take one of the b's 18:44:28 <Brandon> and certainly it would be sore at that time 18:44:38 <Brandon> so its easy for us to sit here now and say yeah just reverse then 18:44:49 <Brandon> but certainly wont be as easy if you are down 10 to 15% on a day 18:45:40 <David> you'd reverse with the same large sizes B 18:45:49 <Brandon> well 18:45:57 <Brandon> there are only 2 pieces of data to work with 18:46:10 <Brandon> and you need 36 in order to have statistical significance 18:46:28 <Brandon> you could have 18:46:28 <Brandon> but in those two cases 18:46:34 <Brandon> personally I don't know what Ill do on the day im wrong 18:46:41 <Brandon> and im sure that day will come 18:46:55 <mike35> on a 4% gap, where is your stop 18:47:14 <Brandon> quiet honestly I doubt I would go on and continue trading 18:47:32 <Brandon> but right now since i haven't been kicked I can claim I would :) 18:47:39 <lee1> So with the nasdaq this morning, please place the following possible trades in order of most appealing to least appealing to you? Buy the opening in the 71% hope that the gap would fill? or waited for the gap to fill and then short sold the gap fill ..........OR......... Short sold after it traded below the opening price? 18:48:05 <Brandon> short the open 18:48:11 <Brandon> I don't know what happens after the gap fills 18:48:27 <Brandon> what I mean by that 18:48:35 <Brandon> is that its a crap shot in most cases 18:48:46 <Brandon> but what I do know 18:48:52 <Brandon> are the stats on the various gaps 18:48:54 <Brandon> and I can work with that 18:49:02 <Brandon> so the most appealing to me 18:49:07 <Brandon> is to short fairly soon 18:49:17 <Brandon> but 18:49:21 <Brandon> this is really key 18:49:31 <Brandon> even though I know there is a good chance here that the gap will fill 18:49:37 <Brandon> if there is not a close point that I can put a stop 18:49:39 <Brandon> ill pass 18:49:40 <Brandon> now 18:49:44 <Brandon> in the case of 4% gaps 18:49:53 <Brandon> honestly I just take my margin down 18:49:56 <Brandon> I double my position 18:50:03 <Brandon> and ill hold it until I puke my guts out 18:50:10 <Brandon> if it works against me 18:50:19 <Brandon> (only 17% of the time it will) 18:50:26 <Brandon> but Ill just hold till im crying 18:50:29 <lee1> thanks 18:50:38 <Brandon> a 3% gap 18:50:45 <Brandon> I treat like a ""normal"" gap 18:50:54 <Brandon> and a 2.4% gap the same 18:51:01 <Brandon> even though I know they are very unlikely too fill 18:51:06 <Brandon> if I cant find a close stop 18:51:09 <Brandon> I just pass and wait 18:51:13 <Brandon> but on the 4% gaps 18:51:17 <Brandon> I know on those days 18:51:37 <Brandon> I've pretty much resigned myself to the fact that im going to make or lose 10 to 15% of my money that day 18:52:00 <David> with a 90+ % chance of it, why not go for it 18:52:16 <Brandon> now 18:52:24 <Brandon> if you are not 100% certain in your trading 18:52:36 <Brandon> then what you should do is wait for the setups to occur 18:52:40 <Brandon> and there is nothing wrong with that 18:52:41 <Brandon> for example 18:52:49 <Brandon> yesterday in the SP 18:52:55 <Brandon> I did not buy that right away 18:53:05 <Brandon> I waited until not only did we have a large gap 18:53:11 <Brandon> but we had a 2 day buy reversal 18:53:24 <Brandon> (keep in mind the numbers we are dealing with tonight are on the Nasdaq) 18:55:04 <Brandon> any questions? 18:55:22 <David> it's pretty clear here B, thanks 18:55:28 <Brandon> anyway 18:55:30 <choo> (if I can't find a close stop)??? 18:55:33 <Brandon> I always get questions about 18:55:40 <Brandon> how can you jump in on the open so soon 18:55:45 <Brandon> and that's why 18:55:52 <Brandon> I know exactly what my odds are in all cases 18:55:59 <Brandon> if I cant find a close stop then I just pass in most cases 18:56:06 <Brandon> unless I've built up some money 18:56:10 <Brandon> what I mean by this is that 18:56:21 <Brandon> if I've been having an extraordinarily good streak 18:56:29 <Brandon> then im willing to do a few things that take on more risk 18:56:44 <Brandon> which is probably why those extraordinarily good times don't last a long long time 18:56:47 <Brandon> but in any case 18:56:51 <Brandon> that's how I approach it 18:58:07 <lee1> Thanks B 18:58:20 <james2> makes sense 18:58:23 <Doc> THX 19:00:07 <Brandon> does this help you guys? 19:00:19 <David> always a big help B 19:00:25 <james2> yep 19:00:30 <Doc> yes 19:00:42 <David> anyone can point to a flag and say ""there you go"" but it's these nuances that make the real difference 19:00:46 <lee1> Knowing the percentages helps a lot, thanks 19:00:47 <David> IMHO 19:03:46 <lee1> Do you not sometimes wonder if the market makers have made the gap too large or too small? 19:04:23 <lee1> i.e. larger than warranted or smaller than necessary 19:05:35 <Brandon> they always do 19:05:40 <Brandon> they have to take the other side of the trade 19:05:45 <Brandon> so they want to bring value of some sort 19:05:50 <Brandon> because they have NO CHOICE 19:05:55 <Brandon> but to be in the position 19:07:26 <mike35> know the % gives me a lot more confidence to trade more aggressively. wish we had this class 3 days ago 19:07:33 <mike35> knowing 19:16:05 <mike35> thx b