Results of Monday’s Best S&P Futures Turning Points: Neither trade triggered.
Today’s Best S&P Futures Turning Points (consider wider stops and less size in fast moving markets):
Buy 4467.00 stop 4463.00. Short 4553.25 stop 4557.75.
The World Index: (+100/-100) gains from -14 to +14 in a world of mixed sentiment and low volatility.
Catalysts: Building Permits & Housing Starts @ 8:30. Waiting on FOMC tomorrow.
Quick Tip: Trade Probabilities
No matter your skill level, forecasting price direction and duration is uncertain.
The one certainty we have in trading is that prices will move. Which way and by how far are what we must figure out. Guessing doesn’t work. Using probabilities based on a large body of evidence does work (at least enough of the time).
You get your probabilities by capturing and analyzing your trade data (lots of it). Most traders will initiate a strategy by back-testing and documenting what happened. The more stats you have for each historical trade the better.
Here are the key statistics you’ll need to know for both long and short entries (strategies are rarely “symmetrical” which means your eventual rules for longs and shorts may be different): win%, average winner, loss%, average loser, maximum adverse move, maximum favorable move, time of day, higher timeframe trend, and any other information from your favorite indicators.
You already know how to capture and use the win/loss data. A strategy that wins 50% of the time and has a bigger average winner than loser is a great candidate. Any combination of those stats that has a positive expectation is good.
What may be new to you is the concept of Maximum Favorable and Adverse Excursion (MFE, MAE). This is simply how far price moved IN and AGAINST your direction before the trade terminated.
Logically, the MAE is your stop loss price. But what is vitally important is knowing for all those trades that DIDN’T stop out, how far did price go in your favor, MFE. This will help you decide on profit targets.
The MAE/MFE will vary with each strategy you trade. You’ll know how much by capturing the data. For example, in our trend trading strategy the S&P has historical MFE of 4 points 67% of the time and 7.50 points nearly half the time. Good to know.
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