December 20, 2021

iCahn Day Trade Stock Index Futures

%BB Dynamic Breakout and Reversal

The development of a trading system first considers its time horizon

Since the strategy %BB-DBR is day trading then by definition, it must exit on or before the end of the day. This is a key to understanding how and why day traders do and act as they do because they must be correct for a limited period, not days weeks months but within hours.

With that being the case our job is to find a pattern that will become profitable by the end of the day. A traditional day trading system is looking for a setup leading to what is called a range day. That is a trading day that opens near its low closes at or near its high and the system takes the trader long. It does not matter what kind of entry, it could be a breakout or a reversal.

So, if the market opens and declines from the open, a reversal pattern takes the systems shortly, and prices closed at the low of the days is the ideal pattern. Therefore, when the developer finds a pattern that is profitable with good risk to reward ratios without the constraints of money stops, he has a technically sound strategy. That is one that tells him he is PROBABLY correct by the end of the day his position will become profitable.

Here is an example of a breakout that closes at the end of that day at the high of its range. The open was near the low of that day’s range, followed by a breakout and the exit MOC.

The efficacy of entry is just another way of pointing out how much the position had to go underwater before it became profitable. Some trades are perfect getting in at the low and out at the high; some never go underwater, others are less efficient and do go underwater before going profitable or going out for a loss.

Money Stops put first in trading development is the opposite approach. The developer uses an arbitrary money profit target and a money stop-loss that fits his account size first and from that basis searches for a valid trading strategy that is profitable.

With our approach, the money stops, or percent stops are brought into the systems AFTER we have a profitable system – the money stops are brought in like an envelope.

Refer to our text on money stops, link here. One of the critical elements that a successful trader needs to get their head around is the difference between money and price. Money management is not the same thing as risk management. This is not a little point that is squabble about.

You cannot make a good money management program and apply it to a bad trading system and make it better. NO MATTER HOW GOOD THE MONEY MANAGEMENT METHOD.

You can take a good money management strategy and apply it to good trading systems and make it better. Money management is about how much the trader should risk and money stops (both loss and profit). The size of your trading position is in direct proportion to the value of your portfolio.

The rule you hear about being chased by the vast majority is the 1% rule to use a stop that is equal to 1% of your account size on the trade. The market could care less.

Risk management is nothing to do with stop losses or anything relative to account size and from our school of thought nothing to do with the trade by trade p&l – based on neither real nor hypothetical trades. Fancy algorithms based on the trailing P&L are just elaborate ways of chasing the equity curve.

Proper risk management is based on price; it answers the questions should I or should I not take a risk. Our systems have a risk management formula built-in, and we use the same model as a governor for opportunity management. See 14-page User Doc, with rental or purchase.

You can download the TradeStation Reports here, be sure to check out the amount used for slippage. 

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Great and Many Thanks,

Jack F. Cahn, CMT

Contrary Thinker since 1989,
Copyright 1989-2021

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— Contrary Thinker does not assume the risk of its client’s trading futures and offers no warranties expressed or implied. The opinions expressed here are my own and grounded in sources I believe to be reliable but not guaranteed.

— Pricing is subject to change without notice. My indicators and strategies can be withdrawn for private use without notice at any time.

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