Raschke Execution Techniques

Execution Techniques & Trade Management Tools

Li nda Ra sc hk e, LBR G rou p NY Traders Expo, 2008

Execution Techniques and Trade Management Tools The Relationship Between Entries, Exits and Stops

[email protected] LBRGroup.com

2/27/2008

Copyright (C) LBRGroup 1997-2008

Trading is about location and timing.

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Traders want an edge in knowing when and where to enter and exit trades.

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PROBLEM: A single tool, such as an indicator, does not always identify a high probability trade opportunity.

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SOLUTION: Com bi ne co nc ept ual wi th a naly ti cal tech niq ni qu ues. es. You You abil abireadi liity ty tto o prsk ociless d data on on a ti mely basi s (tape ng ls ) wi llata als o (tarpe im pr ov e as yo u gain in exp eri enc e. #1 - Mark et Pro fi le Market le Con Con cepts cept s + #2 - Tech ni cal An Analysi aly si s Chart in g

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Market Profile can help teach market structure and show data in a “conceptual” type of format.

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. Technical Analysis indicators can help identify when and where.

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Building a Solid Market Foundation!

#3 – CONFIRM (Indicators / Oscillators)

#2 – WHEN (Volume Charts or discretionary tape reading)

#1 – WHERE (Market Profile Charts)

M a r ke t U n d e r s t a n d i n g

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Self-Understanding


A general comment about the relationship betwee n Ent ries, Sto ps , and Prof its 

There is not always a relationship between a trade is entered and where a trade is stopped out.

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For example, with time based stops, the stop out level has no relationship to the initial entry price. It’s not necessarily the entry that makes a model or system successful. It’s all about the exit strategy! The larger the target, the lower the % win rate.

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The smaller the target, the fewer times the stop will be

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hit (all else being equal). The wider the stop, the higher the % win rate.

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MARKET PROFILE CONCEPTS Market Profile is a way of organizing data, activity and structure. It is a tool for putting the current trading environment into a context. When we can detect the presence of the “higher time frame player”, we can use trailing stops and manage a trade differently. When the market is starting to come into balance, a trader will do best playing for small wins or scalps only. “There is no greater indicator of what the market is doing then the market itself.”

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Defin ititiion epts forr onss and ccoonc nce pt s fo un ders tand in g th e mark et    

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Initial Balance – the first hour’s range Range Extension – move outside of the first hour’s range Value Area – 70% of the day’s activity level Single Print Buying Tail – one time frame price rejection at the lower end of the range (30 -minutes) Single Print Selling Tail – Also considered to be a form of “excess”. Tails cannot occur in the last time frame of the day. Point of Control – where the most amount of activity takes place.

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Class ic Ma rk et Pro fi le chart w it h Valu e Ar ea

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Overlapping v value alue areas, areas, Selling Tail

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Mark et Prof il e Valu e Ar eas w it h Exp and ed PProf e Expanded ro fiille

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How URGENT is is the market environment? 

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Should a trader use market orders, limit orders or buy and sell stops for trade initiation? Let’s review some basic market profile concepts to create a framework for understanding how urgent the trading environment is. Traditional means of measuring this include volume, range expansion or momentum readings.

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Six di ffere nt Day Types – 1) “ Nor mal ff erent Day” 

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Initial Wide balance in first hour. This type of day often occurs on news where the initial directional move is strong. Despite the early range is wide, support or resistance is found off the initial drive, and the rest of the day is spent testing back and forth in this range. Normal days are actually rare, despite the name. A trader must recognize the implications and adopt countertrend trading strategies for the remainder of the day.

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Nor mal d ays ays and Tails – detail

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2) – “ Nor mal Vari ati on Day” 

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This type of day does not have as wide a first hour’s range as a normal day. The initial balance or base is upset as the other time frame player pushes price out of the first hour’s range. The rest of the day is then spent forming a new value area outside of the early base.

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3), 4) - “ Trend D ays” – Standard and Doub but Dou bllee Dist Dis trriib ut ion io n 

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One direction movement fueled by high volume. This is an urgent environment. The “other” time frame player is in control from the opening price. Each time frame makes lower lows and lower highs (or, vice versa). A double day lacks strong Single opening drive, andDistribution instead hastrend a narrow initialthe balance. prints then market the move out of the initial value are and the other time frame player remains firmly in control.

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Dri ve out si de Narr ow Ini ti al Balanc e

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5) - “Non -trend tr end Day” 

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A Non-trend day has no directional conviction, no range extension, and minimal activity level. This type of day often occurs before a big news release or economic event. Market participants balance their positions in front of the event. The is no market conviction and little market participation.

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6) – “ Neut ral Day” 

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The market tests on both sides of the initial balance. Price continues to rotate on both side of the opening price. Both the buyers and the sellers are active but no one is in control. This type of day tends to form a broad “value area” or trading range. A breakout from this range must be accompanied by an increase in volume to indicate that the other time frame player has gained control.

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Neutral Day – no conviction

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OPENINGS 

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An increase in volume or range expansion is our first clue that there might be a more “urgent” trading environment. Let’s review some of the types of actions that can take place off the opening.

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OPENINGS 

Open Auction: Price rotates around the opening without any clear conviction.

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Open Drive: moves in a strong directional manner right from thePrices opening. Open – Test – Drive: After the market opens, the prices tests in one direction and then sharply turns around and drives in the opposite direction. Open – Rejection – Reverse: The opening is outside the previous day’s value area – the move outside value is rejected and the market reverses sharply back into the previous day’s range.

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Open – Rejection – Dri ve, Gap ou ts ide value area

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Bonds – tr end day and dr iv e off opening op eni ng,, fo ll ow ed b y a ne ut ral d ay, and th en ano th er open -drive.

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A market that is “ out of balance” demands urgent entry. Volu me confi rm s th e trend. W hen there is l ig hter vol um e, pl ay play for s mall targe ts onl y.

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Openi ng relati ve to a pr evi ou s day late aft ern oo n mo ve. oon 

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If the market has a move outside of value area in the afternoon with a weak or strong close, this can either be short covering (in ca se of up close) or, the higher time frame player stepping in. If the market up close) or, the the previous higher time frame player in. IfAM thesessio m arket holds above day’s value areastepping in the early n, then it can be assumed that the higher time frame player was stepping in, and further upside continuation should be expected. However, if the price drops below the previous day’s value area, then the late afternoon move was nothing more then short covering by day traders.

Recognizing the presence of the higher time frame player is such an important concept!

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SP – classic t rend day down, fol low ed by u ual unnus usu al reve rs al bar

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Same market action shown by 30-minute candlestick charts

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EC – mark et p ro fi le 30 mi nu te – ris ing value areas i n t rend

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EC – mark up (“Single Prints”)

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Market Prof ile – Big P ic turre e Pictu

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Mark et Pro fi le exp expande d iin ntto o 5 minu and ed mi nu te int erva ls wit h vo lum e.

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Classi c Trend D ay w it h elo ng ated pr of il e

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Vol um e as a co nf ir mation /no n -confirma tion tool

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Bu y at Market, Mark et, Jo in th e Bi d, Take th e of fer

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Most pla tfor ms of fer mu lti ple method s for trade management .

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A short term moving average has a lower high in a dow ntr end . Let’s us e a sell s to p to pu ll u s in to a tra de.

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Bra ckett yo urr trade s – Bu p above/ OCO/Bu y lliim Bracke you Buyy ssttoop abo ve/OCO/Buy miitt below

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“ OCO” or B racke t Funct ion s can be entere d co nti nge nt Func tion upo n an in iti al f ill , or aft er t he tra de ha s b een exe cut ed. it ial cu ted.

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Sell Li mi t p lace d at p revio us resis resi sttanc anc e area

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Tighte n your s top to c inch i n profi ts

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Tig hte n st op t o lo wer end o f pr evi ous range

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Sell OCO – Sell Li mi t and S ell Sto p i n c ase the li mi t is not f ille d

Ec1.lnk

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Now u usse e “ OCO” fo r Exi t and trtr ade mana gement geme nt

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The Trendlines sho w entr y and exit f or t his EC sc alp scalp

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Trail in g Sto p Fun ct io ns 

ONLY should be used at specific structural points!

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Breakouts, Trend reversals as defined by the wave structure, and after A-B-C formations in a trending market

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Keltner Channe ls on a 5 mi nut e cha rt

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Vol ati li ty Sto ps 

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ATR = Average True Range 3 ATR +/- highest high or lowest low of last 10 bars 3 ATR +/- moving average of close, high 3 ATR or low. +/- moving average of close, high

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DAILY CRUDE – VOLATILITY STOP

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BEANS, daily chart, ATR trailing stop

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The End!

Thanks f or Att endin g.

Cont act Inf or mati on Lin da Rasc hk e www.lbrgroup.com [email protected] 888.LIMITDN

MF Glo bal www. mfglobal.com 312.528.3250

CME Gro up 800-331-3332 312-930-1000 [email protected]

Raschke Execution Techniques

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