Can’t capture profits fast enough? Automate Your Exits.
This week the Feature in Focus is the Automated Trade Exit Management Strategies. Having automatic, defined exit prices on the DOM when trading fast markets, can help better manage our position, not only on the target side but also on the stop side. How many times, have we had a profit on our hands and markets reversed so fast that we had to exit at the market, at the worst possible price? In this video, we will show how to set up a simple stop loss strategy and a more complex strategy with trailing stops and multiple legs, and also show a small feature that some might not know when moving orders manually.
Notes:
Hi all,
The Feature in Focus this week is the automated trade exit management strategies.
This is a tool that is easy to work with, we can literally have a strategy set up with only 4 clicks and I assure you no one will get lost through dozens of settings like some other platforms have.
Simple Stop Strategy
And let’s start by opening the Strategy Manager and creating a simple stop strategy. We can create as many legs as we want in our strategies and delete them as well.
We set a quantity of 3 lots and the stop order will be placed 5 ticks away from our entry price and we leave the remaining options as is.
To select this strategy, we need to go to the Trade Window and click on this dropdown menu to select it. Notice that when we select the strategy the maximum number of lots will update automatically with the default qty we set, which in this case is 3 lots. And although we can change the maximum quantity, for example, to 10 lots on the trade window after selecting this strategy and executing the 10 lots when we place the order, notice that the strategy will only manage the 3 lots we set as default. The remaining 7 lots will need to be managed manually by you.
We select again our strategy so our default qty gets set, we place our sell order, we get short, and our stop loss order is placed automatically, 5 ticks away from our entry price as we set earlier. The market starts to go against our position, executing our stop order.
Trailing Stop Strategy
Let’s now look at a Trailing Stop strategy where our stop-loss order will move automatically.
We maintained the same qty of contracts we’ll be trading, we enabled the stop trail option by setting it up to 6 ticks, which means that this stop loss order will automatically follow the best bid or offer, not the last price. We also set a target order which will be placed 10 ticks away from our entry price, and since we set up a stop and target for this strategy, we enabled the OCO option which means when one of the orders, the stop, or the target, gets executed, the other order will get canceled automatically.
We place our sell order which gets immediately executed, and notice as prices move in our favor, the stop order starts to automatically trail the prices to the downside.
The target gets executed and since we enabled the OCO option, our trail stop order gets canceled automatically.
Multi-Leg Trailing Strategy
Let’s look now at a Multi-Leg Trailing Strategy where we can have multiple targets and multiple stops. In this example, we have 4 different targets but a single stop.
In our first leg, we’ll be trading 4 lots, we have an 8 tick trailing stop, and a target of 6 ticks.
In our second and third legs, we’ll be trading 2 lots each, 8 tick trailing stop and we set a 10 and a 14 tick target. And in our fourth leg which we set the Qty as an asterisk, it will trade the remainder of the maximum number of lots we set, which in this case is 12 lots. We can set the Qty like the other legs, where we set an actual number of lots to trade, but the asterisk here gives us the advantage of adjusting the remainder of the lots to trade, automatically.
We place our buy order, making us long 12 lots. We get our 4 targets distributed on the D&S based on the number of ticks we set on the strategy and notice that the fourth leg is showing the remainder of the 12 lots we bought, which in this case is 4 lots.
Our trailing stop immediately starts to trail as the market moves our way, and our first target is executed.
Something we can do here is to adjust the targets based on how the market is trading. To manually move the orders, we have several options. If we click on the 16.75 price, we can move the order closest to the inside market, which in this case is the 2 lots at 14 evens.
If we want to move a specific order, in this case, the 4 lots at 15.50, we can click on that price and then click on the price we want to move that order to, in this case, 16.25. We can also move the order by clicking and holding on the order itself at 15 evens and drag it to 15.75.
Since all orders are OCO, as expected, as the market continues to move our way, executing our targets, their corresponding stop order gets canceled.
FREE BONUS: Take a look into the decision-making process of professional traders with this video training series that helps you make smarter trading decisions. (Article continues below)
Order Flow itself is simply information. Just like charts, it can be used in a number of ways, some good and some bad. But let's first break down order flow into it's components so we all agree what we are talking about:
Order Executions/Tape Reading - This aspect is the real flow of orders. It's the information we see in Time & Sales, Footprint Charts, Cumulative Delta. It is looking at market orders, either as they execute or historically. I guess this is the "true order flow". Every trade is a buy and a sell. We look at market orders because we consider them to be more aggressive. When someone trades with a market orders, they are giving up a price to get an instant fill. Limit orders on the other hand just lazily sit there waiting for a market order to hit them. Often these are market makers with no directional conviction. So we see market orders as being more significant.
But we don't use these in isolation.
Volume Profile/Positions - The tape reading part helps us assess various things like momentum, traders getting stuck, balance of trade BUT the volume profile helps us understand where people are positioned and likely to get stopped out. I sometimes call this "Order Flew". It's important to know when trades will be "washed out" - for example - if we have a volume cluster on the S&P500 Futures and the market moves up 100 points and back down to it, it's unlikely short term traders on either side that were positioned there will still be there. But recent, nearby volume helps us assess areas of positions.
Market Depth - The bids and offers, the lazy passive orders waiting to be hit. This is part of the story but in terms of overall importance, I'd put it at around 20% at most. For example - if you return to the high of the day on any market, the offers will be quite large directly above the high. It means nothing at all. It's just a quirk of the market. It does not help you tell if a price will hold. On the other hand, if you see large depth and as we approach it, we see more added to the depth in front of that price, it means others are front running that depth and that is a useful bit of information.
This is the key - it is all just information. Just like price charts are information. When people look at Order Flow, they consider it to be a technique more than a set of information. They look for things like iceberg orders and decide to make a one rule trading system to fade every iceberg, For these people - yes, order flow trading is overrated because they are trying to ignore everything else going on in the markets and construct a trading system a chimp could execute.
For those looking to improve a decent trading approach, the best thing to focus on in Order Flow is momentum. Once you can read momentum you can:
- Avoid getting into positions when momentum is against you.
- Confirm trades are working after entry when momentum goes your way.
- Exit trades in profit when momentum fades.
That's perhaps the easiest way to use order flow because momentum is easier to read. It's about the market continuing to do what it's already doing. On the other hand, reading a turn in the market with order flow takes a higher level of skill and a little longer to learn.
Order flow can't put lipstick on a pig. It won't help you 'improve' something that doesn't work anyway, which is why whenever someone calls me, the first thing I ask is what they are currently doing and we discuss whether they need a reset or whether it will actually help.
When Jigsaw started back in 2011 - we were one of the first in the space and certainly had the best education. It was always going to attract the underbelly of the trading education/tools world and now we see stuff out there that is so complex but so impressive and futuristic that new traders are drawn to it like moths to a flame.
So here's my advice when looking at Order Flow
- Order Flow can't improve something that doesn't work.
- Order Flow can be used on it's own, without charts to enter and exit the market but you also have to be able to recognize different market states that need different/altered setups. There is nothing magical about this.
- Don't start jumping at shadows and take 50 trades an hour in your first week looking at Order Flow, be selective. It can be exciting to see cause and effect play out in front of you for the first time but don't overtrade.
- Do drills to learn how to read it before you trade it.
- Markets can only go up and down. Don't overcomplicate it. If you have too many Order Flow tools on your screen - you will not be able to make consistent decisions. Less is more.
- Take time to choose a market with a pace you like. Interest rates might send you to sleep, the DAX might give you a heart attack.
It is hard to see how a set of information could be overrated. It is true that some methods of presenting this information are better than others. It is also true that some people simply get on better with different tools (e.g. Footprint vs DOM).
There's a middle ground between complexity and simplicity that will leave you making consistent decisions where you improve over time. For those people, Order Flow will be way underrated because they will be the one's getting the most out of it.
Those that jump in with both feet on day one and those that have 100 different tools up, for those, it's a painful experience.
Keep it simple and manageable. Start with momentum reading and build from there. You will never look back.
0 Comments