The Sell signal in the SP500 is flashing again. The market is $40 form our original entry but the Average True Range has not spiked and the Russell-SP500 spread has continued to rally. Both are hitting their bands. I will enter another piece of the Sep 1275-1545 risk reversal (long put -short calls) on the violation of a daily low in the SP500.
A good article from WSJ about the last days of Bear Stearns.
Ken Heebner of the CGM Fund has posted some unbelievable numbers. How about 80% return last year. Yes I said last year while everyone else was scrambling. He rode the housing wave up and down and jumped on the commodity boom. Check out this article
I put on a risk reversal in the Sep SP500 on May 20, 2008 with futures at 1421.00. I bought the Sep 1275 puts for 23.00 and sold the Sep 1545 calls for 13.00. My indicator for the short is a combination of two factors. I use a proxy for option volatility. It is a 10 day average of the average true range. It is highly correlated to implied volatility levels. I like to see this at a low level. The other factor is the Emini SP500- Russell Spread. The spread widens during bullish runs. I like to see it at a high level. The trigger is the combination at the same time. The last two signals were on Dec 25, 2007 and Mar 27,2008. When the setup is fired then I wait for a violation of a daily low. The delta on the position is 40. It equals the percentage of a full contract position. If you bought 10 risk reversals then you are synthetically short 4 SP futures contracts. I bought in one futures short already. The next goal would be to buy in the short calls around $1.00. The exit of the entire position would be the reversal of the entry signal. in other words a high implied volatility spike with a low SP500-Russell spread.
Today’s article roundup
A Tale of Two Housing States Real Clear Markets
Writedown Bug For Lehman Fortune
Trichet Says Shocks Aren’t Over for Europe’s Economy, WSJ Says Bloomberg
Buffett sees “long, deep” U.S. recession CNBC
Long Term Investor Screen Investors Business Daily
I’m back and will begin blogging on a regular basis now. I will still have posts on trading but will add daily links for good articles and a section on market wizards and gurus and their knowledge and it’s applications to you.
A big gap open is expected in the stock market Tuesday morning. I analyzed a selection of past -2% gaps lower. After careful analysis, I designed my anticipated pattern and game plan. My game plan is to buy after the open on a strength violation in the 5 min chart. A similar violation after 9 am is another buy target. A mid morning high will be established around 10am and I hope to have locked in a good 75% total position profit by then. I’ll look for some finishing strength after 1 pm for a strong finish into the close.
I have had the Entrecard Advertising button on my blog for over a month. I am very happy with it so far.
Here are my top clicks from other blogs through my advertising
Poly-Web 11
Contestu.com 10
I currently have five blogs in my portfolio. Two of the blogs are updated regularly.
Maximum Adverse Excursion(MAE) is the maximum loss of a trade during its complete time period. It can be a valuable tool for stop placement. If your winners have low maximum adverse excursion then moving your contracting your stops can dramatically increase your results.
Example
I have an intraday daytrading breakout system in a Sector index. It is profitable system that has these statistics below with a current stop of 1.00.
- Profit Factor 1.52
- Win % 52
- Average Win 91.26
- Average Loss 65.65
Here is a screenshot of the Maximum Adverse Excursion graph from Tradestation.
The red triangles are losing trades. The green triangles are winning trades. The X-axis is Drawdown and the Y axis is Profit.
A large cluster of green trades to the left is a great sign. This indicates that the winning trades don’t go against you from your entry point. The trick is to find the dividing line that separates the majority of the winning trades to the left of your line. I selected 33 cents. I then reran the strategy and these are the updated numbers
Here is the new Maximum Adverse Excursion Graph
The profit factor jumped because I was able to raise the average win and dramatically lower the average loss while lowering the win percentage modestly. That is the goal. If you have any questions drop me a line.
