I wanted to use today’s price action as an example of how sometimes an Alert can get “thwarted” as I like to say, and why you might consider using a little discretion under certain circumstances.
Today’s price action was atypical and very unusual for several reasons.
1) The opening range was 22.25 points (under normal conditions it’s been averaging 7-10 points)
2) The “fill” on this Alert was 4.00 points past the Alert Price (normally it’s a couple ticks to a couple points)
3) The distance to Target 1 was 13.50 points (in normal market conditions it’s usually 3-5 points)
4) Due to the volatility in the first 10 minutes of the session, the 18.00 Max Stop was in play (we’ve only see that a handful of times this year)
So all these factors sort of came together to cause the first alert this morning to hit the Max stop, which is always unfortunate. However it’s actually quite rare so I thought this would be a good “teaching moment”.
Here’s the chart where I have all the details marked up on the 1-minute MES chart:
So yes, trading the system purely mechanically resulted in a full stop-out which always sucks. It happens occasionally.
But the real gut-punch is the fact that the price came within 1-tick of hitting Target 1.
And the fact that Target 1 was an eye-popping 13.50 points which is highly unusual.
So think about it. MES dropped about 50-points in the first 10-minutes of the cash session today which is definitely out of the ordinary.
The system tried to catch the down move but the speed and intensity of the move caused our fill to be 4.00 points past the Alert price (which is usually the distance to T1) so the “fill” on the alert was less than optimal.
Add to that, the distance to T1 was roughly equivalent to what would be the distance to T2 under normal circumstances.
And of course the 18.00 point Max Stop was in play (due to the volatility and ATR’s) and the price snapped-back just enough to barely poke the max stop before reversing and subsequently hitting Target 1 a short while later.
All these little things conspired to thwart this alert. I’m not making excuses for the system because the market has a mind of its own and anything can happen. But it’s extremely rare to see something like what transpired this morning.
It got me thinking about how we might approach an alert like this in the future and perhaps avoid the damage by using a little “discretion”. I know everyone hates that word because they want to just trade the system like a robot every day and not have to think or make any judgement calls. Just blindly follow the system and make a ton of money without any effort. In a perfect world that’s the way it would work.
And quite frankly, based on the recent performance of the system, this alert was just a little bump in the road and a small giveback since the performance has been stellar. So in theory you can indeed trade every alert purely mechanically and you’ll be fine – over a long series of Alerts.
Remember, while the system does indeed provide a “statistical edge”, near-term results are random. The edge in a system plays out over a long series of trades and any one win or loss is meaningless.
So what could we have done to avoid this full stop-out by using a little judgement?
We could have chosen to just skip taking the Alert given the speed and intensity of the move right out of the gate. Especially since we saw the Range was way wider than anything we normally see. Another reason we might have chosen to just pass on this alert was the fact it happened immediately following the system coming online. On a typical day, there’s a bit of time that passes before we see an alert. I’d say 10-15 minutes into the session or sometimes even longer.
This is what we call an “opening drive” Alert and those can have slightly different characteristics. (notice the Alert was given 1-minute after the system came online).
The last reason we might have chosen to pass on this Alert was the fact that the fill was so far away from the Alert price (4.00 points) but that’s not a hard and fast rule because in volatile market environments that’s fairly typical. We can get filled way past the Alert price and it still works out. It’s more of a yellow flag and it’s due to the price movement in the 1-minute that we had to wait for the “trigger candle” to close.
Getting back to the idea of using a little discretion…
We could have chosen to just go ahead and take the 13.00 point gain when the price got within a tick of Target 1. Or we could have chosen to use a much tighter stop than the system max stop. Look at the price action in the 7-minutes immediately following the Entry Confirmation. There were several opportunities to make a judgement call there given the craziness of the price action we’d already seen.
Lastly, we could have decided to use a tighter stop than the 18.00 max stop. Especially once the snap-back started and it became fairly obvious that price missed the Target by 1-tick. In hindsight, that would have been the best way to minimize the damage in this specific case.
Heck the Alert was showing a profit of +13.25 at one point and we could have made the decision to protect some of those gains. Protecting gains is a viable discretionary strategy when trading the system no matter where the Trailing Stop happens to be.
Again, the point of this post isn’t to try and make excuses for a bad trade.
It’s probably not a good idea for us to increase the Max stop to 20.00 points just because this one Alert got thwarted.
I just wanted to do a little forensic analysis and dig into what happened in the hopes it will provide a little insight. There are plenty of instances where the price action itself just doesn’t cooperate. We’ve seen plenty of times where price comes within a tick of T2 and doesn’t hit it and also “thwarts” a perfectly valid Alert too.