After last Thursday’s web seminar on how to identify and trade volatility breakout setups in the futures markets, a number of people signed up for a trial to Trade or Fade (ToF). I’ve had a few questions about how to use ToF. A number of the questions have been on the stock index futures; as there was a ToF breakout setup in the eMini S&P Futures today is a good day to go through a trade example.
Below is the daily chart for the June eMini S&P futures and last night’s Trade or Fade report for them (for today’s session). ToF labeled today a “Trade” (breakout setup) day as Friday’s range was the narrowest of the previous four sessions. This narrow trading range was an indication of decreased participation as Friday’s rally ran out of steam.
Trade or Fade Report - April 18
This range contraction results in the market finding a short term equilibrium point. From this point we anticipate a trending move to start as a new move sees positive feedback – increased participation as it moves away from the equilibrium. In this case, the initial selloff saw stop loss and new short selling as it moved lower, which added to the downside momentum.
Today’s breakout could have just as easily been upward. When traders first look into Trade or Fade, one of the first questions often asked is which direction a market will move out of a “Trade” setup. I don’t know ahead of time which direction a breakout will head.
The lack of a directional call is often taken as evidence of my ignorance or a weakness in the ToF method. However, rather than being a weakness the flexibility of the system is actually its strength. Rather than having to make a directional call, we let the market tell us where it wants to go, and we go along with it. I’ll show you what I mean.
Below is a 10 minute chart for the eMini S&Ps. I drew horizontal lines at the three ToF support levels. ToF looks to get short when the market drops under first support (S-1) at 1311.06 with the premise that the drop under S-1 is the trigger for a larger selloff. (Had it rallied, ToF would buy on a move over R-1).
From the short sale at S-1, Trade or Fade had further support at 1303.88 and 1294.17 (the green lines on the chart); these were profit targets for the short sale at S-1. I also added lines at Friday and Thursday’s low; these could have been used as a chart based short entry and profit target respectively.
Obviously not every trade goes this well, but learning to identify trade setups of the sort that Trade or Fade does can help you find potentially explosive breakout setups. By recognizing the setups but not having to commit to a direction helps keep you flexible and better able to anticipate market moves, which means it’s likely you’ll be able to capture trades from a larger percentage of these setups.
For more information on trading breakouts in futures, you can get more information on my Trade or Fade advisory here. For an in depth discussion of breakout trading, get a copy of my Breakout Futures Trading Method book here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
