Richard Bailey
So far in this series we have looked at the difficulties in day trading futures from the perspective of Mapping trades, placing stops, psychology and learning new trades but I have not yet touched on trade execution. This is crucial, as a map and even an access point to a trade will only indicate where to be involved but order flow is the difference between ad good and bad, or even, taking a trade or not.
Where to Focus on Trade Execution
Every Wednesday I live stream to our members a mentored session where they can have their questions answered about market moves, psychology, trade execution, management, exits and anything else. Over recent weeks gold has become a focal area for many traders particularly as it passed previous record highs at $1920 and surged towards $2000/oz. This prompted a few questions about what was going on and also could it turn? The key to understanding the short term drop on 28th July was both psychology of the buyers and mapping how the market had moved from $1800 to a crescendo at $1975. Finally and most importantly where can the short term drop be played from – your access point and how was the move likely to progress? Because participants had been chasing the move higher over the past week it could be assumed that there would be positions accumulating at higher and higher prices; these participants recognise they don’t have a great trade placement but will hold, in the hope that buying continues above their entry point. These are the people who rush for the exit when a clear support area s broken causing a fast liquidation move down which is exactly what occurred on July 28th as explained the video below.
3 Elements of Trade Execution
You now understand where and why a certain move will occur; having explained this I then turned to considering how exactly one would go about executing the trade. This can be broken down into 3 key stages: Access, trade management and exit.
- Access: from your trade mapping and access point can be reasonably easily defined, but what happens at that point is crucial. Having a clear expectation of the type of move is coming up (in this case a liquidation move) will indicate what type of order flow should occur – this should be a distinct departure from the recent slowing down and absorption that had been seen between 1927.6 and 1925.8.
- Trade Management: Here you need to assign a level of risk to the trade execution and define at what point the trade had an asymmetric payout – the point at which the probability of the trade working is very high and the payout significantly higher than the risk being taken. Once 1925.8 was broken the likelihood of reaching a target of 1905 (200 ticks) could be in the region of 80% whilst the stop above 1927.6 (20 ticks) is considerably smaller and less likely to be hit. Now the move is going, management can’t be ignored, and this is where the rotations within the move are key to assessing whether it is still moving in a uniform liquidation fashion or is showing signs of ending and thus bringing about and exit.
- Exit: Your exit can either be a specific target in which case a resting order will be sufficient, assuming the move reaches it. Or an order flow based exit in which case you are either looking for an exhaustion move or a change in the nature of the rotations. In this case and exhaustion occurred and on top of that an iceberg trying to play a continuation move enabled a reversal trade to be executed to capture bonus move partially back higher.
Each stage of the execution process is covered in detail in the below video which followed the original mentored session above. Every type of move (in this case a liquidation- another example of which can be seen here) will have different execution characteristics, but the trade execution itself can always be broken down into the 3. Makes sure you are always working on getting them down in fine detail.
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Richard
