Thirty Minute Rule (Opening Range Play) Analysis

Allan's TMR - Analysis of Profit Objective and Performance

TMR CAN WORK with 5pt stop and 2-5pt profit objective. But returns may not be spectacular. 

Oscar's premium chat room provides worthy company of some of the world's smartest traders who trade with their own capital. Allan, a fellow trader, has once introduced the mythical TMR - Thirty Minute Rule to that room. Not a day goes by when someone does not ask "what is TMR?" so much so that Allan has started asking them to Google it instead. I would suggest you do the same as well, but in very brief, to trade TMR, you watch the first 30 mins of regular trading session (08:30 CST - 9:00 CST) for S&P500 futures. The high and low for first 30 minutes would give you the opening range (TMR Range). Now you wait for breakout from this opening range and place trades in the direction of the breakout. I.e. if price falls below the low of TMR Range, you sell, if price rises above TMR range, you buy. You take profit X points away from the breakout OR you are stop loss if the trade does not go in your direction. Simple! 

Anyways, we recently ended up discussing what sort of stop loss and profit objectives (risk: reward) can applied to maximise the outcome from trading TMR. The issue is to set right level of profit objectives and stop loss level so that the winning trade % (Wining Probability - W) generates sufficient profits to overcome the loss generated from stopped out trades. P&L from 20 days (1 month) of trading can be expressed as

PNL = 20 * W * PO - 20 * (1-W) * ST

Where W = Winning Trades %

PO = Profit Objective

ST = STOP Loss level.

We should also remember that W is dependent upon ST as well as PO or in other words W = f(ST, PO). Typically higher the PO lower the W, i.e. more greedy you are less likely you are to win. Also higher the ST, higher the W, i.e. bigger risk you are taking on a trade, more room you are allowing for the trade to be profitable, however after a certain point, increasing the stop level does not increase the winning trade % sufficiently.

I have done a non scientific data collection and analysis of TMR for last 20 days. Ideally one should do the analysis with 200 days or more. I have used the granularity of 15 min bar and I have collected Max Profit which could have been achieved on a particular day before a 15 min bar broke through the required stop loss level. I have analysed the results based uopn two ST levels. A fixed 5 pt stop and also using TMR Range + 2 pt stop. I have assumed no slippage on the stop entry orders used to enter TMR trades. Some of the observations are:

a) For a given Profit Objective, Wining trade % increases if TMR Range +2 stop level is used at least until 10 pt Profit Objective. 

b) 80% - 90% of TMR trades show some profit before soem of them stopping out. However since one cannot predict the top or bottom of the market, one needs to decide in the trade plan the profit objective to be used.

Results:

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i) It appears that a trade plan with 5 pt profit objective and 5 st stop loss would produce about 10 pts profit at the end of month (20 days). This is not great but it is still a profit and a 4 lot trader can expect to earn $2000 per month trading TMR with discipline.

ii) With a slightly lower profit objective of only 2.5 pt and 5 pt stop loss you can expect to earn about 12.5 pt per month (20 day).

commission cost and slippage is not included in these results and it can severely affect profitability. Commission + slippage greater than 0.5 pt could render the profitability to zero.

Conclusion:

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i) TMR performance could possibly be improved by using TMR Range + 2 stop loss level. However I could not confirm this analysis on my simple excel based model. I wish to paper trade TMR seriously next 20 days and record performance if we get different result.

ii) In my model, I have assumed that all TMR trades eventually get stopped out. That is not true on a trending day where price closes in the direction of TMR trade without ever touching the stop. This can improve the performance of TMR further. In this aspect, my analysis is slightly more conservative. 

iii) TMR trade entered on pullback after initial breakout from range can also increase the performance significantly. So multiple lot traders can actually plan to scale their entry into TMR trades. However I can only speculate on this line as the results should be actually analysed scientifically.

iv) I have only analysed by going through 20 day 15 min chart - a tedious effort, in TOS and therefore my analysis is subject to Human Error. A better and scientific analysis can be done by using back testing applications where you can submit your trade strategy (in the form of script or set or rules to trade) and then run is past previous data to see what results are achieved. If back testing is possible of TOS charts, I am happy to give it a go. Better results can also be achieved by back testing as you can vary the STOP level and see the impact on P&L. 

v) I wish to paper trade TMR on live data so I would have better data to work with next month.

						Max P&L
Date	Open	30 Min High	30 Min Low	30 Min Range	TMR	5 PT	RANGE +2
01-May	869.75	870	864.75	5.25	S	2.25	2.25
04-May	880.75	887.25	879	8.25	L	14.50	14.75
05-May	900.75	904.75	899	5.75	S	5.50	5.50
06-May	912	912.5	907.5	5	S	6.25	6.25
07-May	925.25	927	918.5	8.5	S	20.50	20.50
08-May	916	923.75	915	8.75	S	5.25	5.25
11-May	910.5	912	905.75	6.25	L	4.50	4.50
12-May	911.75	913.5	903.5	10	S	7.50	7.50
13-May	892.75	892.75	886.75	6	L	2.75	2.75
14-May	883	885.25	880.5	4.75	L	11.50	11.50
15-May	889	893.75	886.5	7.25	S	-5.00	9.75
18-May	891	894.25	889.5	4.75	S	-5.00	-6.75
19-May	907	907.75	904	3.75	S	-5.00	-5.75
20-May	915	920.75	914	6.75	L	2.75	2.75
21-May	889.5	893.25	887.75	5.5	S	10.00	10.00
22-May	890	890.75	882	8.75	L	4.75	4.75
26-May	878.75	888.75	878.25	10.5	L	22.25	22.25
27-May	909.75	910.5	905.75	4.75	L	-5.00	2.25
28-May	899.75	902.5	896.75	5.75	S	10.50	10.50
29-May	909.75	912.25	902.25	10	L	15.50	15.50
Notes
1	The granularity is at 15 Min Bar level for the purpose of past data. I.e. the Max which could have been achieved before future 15 Min bar take the stop level
2	It is assumed that the stop entry order is placed at the top and bottom of range. Slippage of .25 pt is not accounted.

WIN% 5 PT	Profit Obj	P&L 20 D 5 PT
0%	30	-100.0
0%	25	-100.0
10%	20	-50.0
15%	15	-40.0
30%	10	-10.0
55%	5	10.0
75%	2.5	12.5
80%	2	12.0
80%	1	-4.0

HOME WORKS (MAY 2009)

General Markets

I usually do not trade markets for purely day trade basis. But I like to analyse the markets after close. After discussion with some fellow traders, I thought about writing the homework here (as comment to this post). This would keep a record as well as enable other traders to put their homeworks too. 

Happy trading.

VS

Gold is really getting interesting

GOLD (GCZ9)

Buy on dips, possibly all the way to 880 if required. Stop below 860 (or 800 if conservative). Target 1500 + on convincing break above 1000

In Jan 2009 I wrote about Gold chart making an interseting formation "Gold is getting interesting". After recent up and down, Gold chart has become really interesting from several perspectives. 

A) Gold will breach tripple top at 990 area if the up move continues. That is really bullish and can propell Gold to new highs. The good news is that no one is talking about it (news papers etc) as they seem to have given up on precious metals in light of recent stock market rally. So it can take some people by surprise.

B) Gold has also consolidated in an inverted head and shoulder pattern since March 2008. That consolidation is about to be completed and possible breakout is on upside.

C) on Elliot Wave perspective as well, Gold looks bullish. The correction pattern since first achieving 1030 high calls for the top to be wave 3, leaving final wave 5 in formation on long term charts. The fib extensions for the 1-3-5 wave and I of 5, III of 5 and V of 5 wave conincide around 1502 - 1540 area.

This setup interesting long term and medium term trading perspective for gold, one worth watching. The trade setups I mentioned in this post require larger stops and therefore good only for managing existing long positions OR with deeper accounts. However buying dips and trailing stops from key support areas on chart should also work on micro managed positions. It could also be worth taking position in longer dated futures (and waiting for price to reach your key points) and certain longer dated optiond around 1500 are still cheap, especially 1000 - 1500 - 2000 butterflies which give potential upside of 500 points.

General Musings : Markets Review of key levels for position trades

Various Markets - General Review

Markets trend - chop and trend again. It seems after the mauling in late 2007 - 08, and then chopping around for a while, many markets have shown some reversal of trends. This can be a goldmine opportunity to be able to catch a new trend in beginning or it can be part of a wider "chop" and reversal to predominent trend of 2007-08 (or more chop in the same trading range). Those who subscribe (or merely use) Elliot Wave theory might recall that bulk of the money is to be made in wave 3 (middle of trend). At the start and end of the trend, the markets are choppy and traders, especially those with lack of discipline tend to get chopped out. Especially for a longer term trading perspective, trying to catch the middle of the trend with trailing stop losses and use coverred options sell/target exit levels can be the key.

Since March 2009, many markets are showing some life and here is my review of key markets, my perceived general trend, and key levels to watch. Something to pass time on a long bank holiday weekend.

INDICES:

The rally from March 09 lows has been impressive. However this rally has been without a good pullback, i.e. retracing 50% or more but still avoiding taking out the lows. So a pullback may be on cards as soon as bulls run out of steam. The question is WHEN?

For now I still see bulls in the market however I have taken 50% off on most positions and trailing stop below nearest support below 61.8% retracement. 200 EMA is still a magnet.

NQ:

Current position - Long

Watch for breakdown below 1322/1300 to signal start of retracement/pullback. NQ has been leader lately on this rally so a breakdown should pull other indices as well. 1240-1190 would be my testing zone and if they hold, could be worth going long again looking for 1680-1760 area as swing trade with stop at March low. The level to be refined nearer to the time.

ES:

Current Position - Flat

For short term, 882 - 875 is key level. If we start breaking from here, need to take some profit and watch for bounce from 799-768 level or infact consider some short position. The key is to hold March Lows to make highs at 1066 level.

ZB:

Current Position - Short

US long dated bonds have broken below key 120 level and are below 200 EMA. The trend is increasingly looking negative. Adding to existing short positions with stops above 123'16 could be a good trade. Target of 116 -113 does not look that far fetched however such weakness in bonds can pull the stock market down as well. Since this apepars to be last wave of downtrend, trailing stop losses would be key. Modified 2 bar high stop can be used to exit out. UBS says that only 18 times in last 20 years Bonds Stocks and USD has gone down together. Is it time for more such occurances. 

GC:

Current position - Long

In times of uncertaininty, having a long position in GC is always useful. Gold has bounced well from the lows and seems to be heading for tripped top, which if taken, can make for a killer move. So buying dips to 950-940 until USD returns to sensible level is the trade with stop below 920. With current level, ES/GC ratio has gone back below 1 but in current market Long GC long ES trade is better way to play for some time. I still count 869 as key low and support.

CL:

Current position - Long

Crude oil seems to be making new high and appears bullish with targets 68/72/80/91 in sight. Buying dips with 55 as stop level for medium term trades adding to existing long positions.

ZC:

Current Position - Long

ZC still appears to be in bullish mode though much of the moves have been in ZW and ZS. However if the grain trend continues, ZC has upside potential until 486 or even 608. Stop as of now around 400 level.

DX:

Current Position - Short

Trend is still down. Could add short at 82 82.5 level with stop above 84 and trailing. It looks to be a long way down so worth holding runner until a clear change in trend.

TRADE UPDATE : British Pound has something going on!

My Development as a Commodities Trader: British Pound has something going on!

Now that my first target of 1.5850 was hit, I have taken opportunity to reduce 50% of my position around 1.5850 - 1.5900 area. The hard stop on the rest of the position is now below 1.4940 area which is well above breakeven.

As of now I am marking next set of profit taking area as 1.6800 on my charts if we ever reach there.

In my heart, I do not see GBP as a very strong currency in the current environment and I have still not figured any fundamental reason for GBP strength other than general USD weakness, hence I am reluctant to back this long trade by too much risk. However I have learnt to trade what I see and now what I think. The chart is still bullish. If there is any reversal, I am watchign the 1.4996 -1.4940 point carefully. If we start to bounce from these areas or even earlier, I would consider adding more to this long as it might have some life left.

As of now, it is enjoy the free ride moment for whatever position I have left on.

Dollar in Doldrums?

DXM9 (US Dollar Index) on ICE/NYBOT

SELL up to 85.75 STOP 86.75 TGT 79.54 - 71.43 (extreme)

Recently I wrote about unusual movement in British Pound where I discussed that British Pound looks heading upwards against USD. Subsequent analysis of USD chart points that USD looks to be heading down against other major currencies (hence the weakness in USD Index). Now this creates interesting situation if USD does appear to be weakening. Back in Sep 2008 I wrote a piece about tendency of world market participants to run to dollar in case of extreme panic or euphoria (the so called dollar smile). Dollar is generally weak in other scenarios where investors look for better returns in riskier areas be it Russian real estate OR Australian copper mines. For most of the bear market of 2008-09 USD has been strong, even if US national debt has been clocking higher every second. And even though there have been some noises in the echelons of power about hegemony of US govt to be in position to control the value of world reserves given that USD is still recognised as world reserve currency. When China sells to Argentina, they do not exchange Peso to Yuan. It goes from Peso to Dollar which Chinese govt reluctantly uses to buy US treasuries to keep as its foreign exchange reserve. However in the new world era, it appears that longer term direction is set to remove USD as world reserve currency. It will not happen overnight, it will definitely not happen in a year but baby steps will be taken to make it happen in my lifetime unless I start playing roulette in Russian casinos. So a very long term direction for USD is down.

 

The confusing scenario or fly in the ointment for USD weakness is the question about recovery in world markets/economies. Even though most markets have rallied strongly since March lows, the economy still appears to be in danger of slowdown. Credit markets and corporate bonds are still pricing in dooms day scenario and even though some bond markets have improved to price in a recession instead of depression, the threat of depression has not gone away and my analysis of bond markets does indicated a lot of pent up energy which can provide a wild swing up in long term bond prices (i.e. a Japan kind of recovery instead of V or U shape everyone tends to talk about).

 

As always, the fundamental reasons will start appearing soon once the charts have started showing direction. This move appears to be in making so if it panes out as planned, this can be a long term ride. One to watch!

British Pound has something going on!

BP/6BM9 Globex or GBPUSD

Buy up to 1.4450 Stop 1.4100 Target 1.5850 - 1.7320

British Pound was turning out to be the worst currency (and worst economy) in the developed world. The deficits are comparable to Hungary which had to go out cap in hand to IMF and there were intense speculations as if the same fate would be met by British economy as well in not so distant future. So I was bit surprised to see that BP chart has started showing quite a lot of strentgh lately. OK, some part of that run up is due to general Dollar weakness but BP has performed strongly against EUR and YEN as well and also other currencies. Could it be return of carry trade? Dont think so. GBP barely offers any decent interest rates compared to YEN and unlike AUD/ZAR - we do not produce much commodities so it could not be inflation and run up in basic metals story. So what is GBP charts saying which is not yet out in news? Short covering - may be and in which case the rally will die after some chop around without significant breakout from current levels. 

One reason could be that may be just may be Bank of England will start putting breaks on the quantitative easing and interst rate cuts (not much to cut anyway). Inflation in UK has remained stubbornly high and any sign that BOE is getting concerned about the inflation may squeeze GBP shorts for some time. Also signs of recovery in world economy would depress dollar and unlike EUR, GBP does not have to bother about Eastern Europe problems. So whatever are the reasons, it would come out soon. As of now the chart looks bullish and worth a punt on GBP long for sometime.

Remember 1989

GOLD (GC) S&P500 (ES)

Still making up my mind about what to do!

Do you still remember 1989 - I was in school around this time in 1989, in class XII. Studying hard (?) for the CBSE exams and various engineering and medical entrance exams which all aspiring students in India ritually take. It was long time before I first got aware of the financial markets and not so long time before I got a taste of my first beer. Life was simple and carefree. There was no mortgage to pay (not even for my parents) and TV's have just stared to appear in my home town. Michael Jackson was still coming out with great numbers  around then. So what is common with 1989 and 2009. Well 1 ounce of gold buys same amount of S&P (a measure of US stocks) as it did in 1989. We certainly have not made much progress financially as the crow flies (without considering dividend of couse which make a significant proportion of the returns from stock market). In the attached chart left scale shows GOLD and S&P500 levels in USD and right hand scale plots the ratio of S&P to GOLD (i.e. how much S&P you could buy for 1 ounce of GOLD). The chart is in log scale to emphasise the relative change. At the time of writing, the ratio is hitting close to where it was in 1989 (0.78 region). 

Now it can mean the following three conclusions:

a) Stocks are very cheap relative to GOLD (i.e. at the level they were nearly 20 years ago) and time to buy stocks.

b) Stock have dropped like stone and there is no faith left in these psuedo measure of wealth and time to pile into "real" assests like GOLD.

c) At least one of S&P or GOLD is overvalued relative to the other and therefore an inflexion point can be in offing.

If you subscribe to option a) time to buy S&P futures and selling equivalent GOLD futures.

If you believe in option b) time to do the opposite i.e. sell S&P futures and buy equivalent GOLD futures (or even physical GOLD if you have lost faith the in whole fianncial world).

If you believe in option c) a market neutral trade can be put on by buying (or selling) equal amount of S&P and GOLD futures. Question would be which direction the ratio is heading.  If the ratio is turning and heading up, S&P would rise faster (or fall slower) than GOLD.  However if ratio is still heading down to regions before 1989, S&P will rise slower (or fall faster) than GOLD.

Certainly times are interesting and that is an understatement. I am tempted for Long S&P and Long Gold position to start with, turning into Short GOLD (if GOLD appears to be topping) or Short S&P (if S&P appears to be tanking further). Let us see what that brings.

For information, 1 S&P emini future is equivalent to 0.3773 GOLD futures so roughly 5 S&P for 2 GOLD.