Trade Aptitude

Results of Thursday’s Best S&P Futures Turning Points: Shorting 4909.75 offered a 9.25-point run. 

Today’s Best S&P Futures Turning Points (consider wider stops and less size in fast moving markets): 

Buy 4892.50 stop 4886.75. Short 4887.50 stop 4893.25 if price falls below and retraces to entry. 

The World Index: (+100/-100) drops from +19 to zero with sentiment mixed. 

Catalysts: Non-Farm Payrolls @ 8:30. Revised UofM Consumer Sentiment @ 10:00. 

Quick Tip: Finding Edge

Every trader and any worthwhile educator of traders talks about edge. It’s what the casinos have. You can win any given day, but they will win every day. Edge = advantage. 

Edge is also mysterious to many traders. How do you find edge? Research is the best start but what are you looking for to validate it? 

Here’s a simple exercise to find and validate the edge in any trading strategy. 

1. Determine your entry and stop loss rules, not your profit targets. Give your stop loss more wiggle room than you would trade (for the research only). You’ll fine tune it later. 

2.  Look at as many trade setups as you can find going back in time as far as you have time to do so. 100 would be the minimum, the more the better. 

3. From the entry price, measure the MOST price went AGAINST you on each setup. That’s called Maximum Adverse Excursion (MAE). Your stop loss will be the most MAE each trade could have. This data will allow you to do the fine tuning of your stop loss. 

3. From entry price, measure the MOST price went FOR you on each setup before stopping out. That’s called Maximum Favorable Excursion (MFE). You will rarely if ever get out of the trade precisely at the MFE. So why do you want to know it? Because… 

4. Divide total MFE and total MAE by the number of trades to find the average. Divide the average MFE by MAE. This needs to be a number well above “1”. The higher the better. 

Forget trying to finesse any rule set that doesn’t have a winning ratio of MFE/MAE. Now you can analyze the data to optimize your stop loss and at least one or two profit targets. 

This process can be automated in many trading platforms (TradeStation, Ninja, TOS) if you want to learn some basic programming skills. Enjoy!

Tired of trading alone? Our team day-trades multiple strategies with edge in a live online environment. Join us, learn the strategies, and trade live with us daily for 30 days. Money back if you’re not blown away!

Trade Fearlessly,

Mike Siewruk

P.S. Forward this blog to your trading buddies. Share in the wealth!