The S&P 500 did its usual thing yesterday after the Fed released its announcement; it sold off a little and then went the other way. You can have all the cool indicators in the world, but if you don’t have the proper trading rules and risk parameters it really won’t matter because you will be out of the game.
The S&Ps did pretty much like we expected it to do; they rallied. Sure there will be times when the S&P will sell off and keep going, but overall if you stick with the idea that the S&P has to go down before it goes back up, it will not only make your life easier, it will also keep you on the right side of the trend.
Today’s View will not be based on all of the S&P’s ups and down but will be centered on trading rules and how that can help you be more profitable and how to get out of losing positions before they turn worse.
Trading Rules
In order to work, the trading rules must fit your personality and your financing. Obviously if your funds are small you may have tighter risk parameters. And if you have deep pockets you’re able to hold longer and risk more. That means you should have pre-set ratios.
An example would be if you risk 2 points you should make 6 points on your trade, a 1:3 risk-reward ratio. Decide on this ratio before you enter the trade and then stick to it. If you abandon your stop and take a deeper drawdown and then get lucky and have it come back in your favor, do not then decide to hang on for a big win to justify the big risk. The trade has already violated your parameters. It is not the trade you planned for. So get out safely and make a new plan.
Another great way for traders to reduce risk is trailing stops and taking profits on part of the position and letting the rest of the position ride. While it may not happen all the time, the great part is that you’re now trading with the market’s money.
Other rules we use and benefit from in the MrTopStep Trading Room include:
- Turnaround Tuesday: Just as Mondays tend to be down days for the S&P, Tuesdays, more often than not, see an upswing. The rule has been particularly consistent in 2014.
- The 10-handle Rule: This is the one we remind you of at the end of every morning’s View. Big moves tend to happen in roughly 10-point increments, usually in between sideways price consolidation at high-volume price levels. The stair-step rise to the contract high of 1892 happened this way. The big moves of the last several days, both up and down, have been about 10 points, plus a little wiggle room for the algos.
Keep an eye on where the next 10 handle move is likely to take place and make sure you are with the trend when it happens. - The Late Friday Rip: For a variety of reasons, we often see one last dramatic move late on Friday. It is a good time to be on guard. You can either profit from being with that rip, or get caught and lose big. Sometimes, the rule is helpful just to know when to stand aside and get started on the weekend.