While we strongly recommend that new users start off trading the Momentum System “purely mechanically” using the strategy outlined in the Momentum System Trade Plan – we know that there are some “special circumstances” that occur in the market – and employing some “discretion” at certain times can make sense.
For instance, a good example is when the Fed interest rate announcement is released. We know the market is going to immediately start making wild swings or make a big move in one direction or the other. It’s typically NOT a good idea to be in a trade when the announcement hits the wire – because the market is going to make an immediate HUGE move in one direction or the other – and the direction is basically a coin flip. Many times price spikes significantly in one direction initially, then reverses and moves significantly in the opposite direction.
The Alert Software itself is programmed to treat every market session the same (without regard to any news events) so if there happens to be an open Alert when the Fed announcement hits, the outcome will likely be the stop getting hit or the targets getting hit within a couple minutes. But again, it’s a coin flip and just not generally worth the risk.
This is probably the best example of a situation where it makes sense to use a little “discretion”.
With that in mind, there some other situations and strategies that one might employ to help reduce risk and perhaps improve on the results of just trading the Momentum System purely mechanically.
Before I get into them, let me just say that I’m confident that as long as the hit rate on Target 1 remains close to 70% the system will always be profitable over a longer series of trades.In 2020 over a series of 412 trades, the Hit rate on Target 1 was 72.57%. In 2021 over a series of 400 trades, the Hit rate on Target 1 was 73.50%. That’s a pretty good sample size.
So any “discretionary” strategies you choose to employ may or may not improve on the long-term results. But there are certain things that just kind of make sense – like avoiding trading during the Fed Announcement as described above.
If you’re just starting out – and just trading the Momentum System Trade Plan with 2-3 Micro contracts – I strongly recommend just sticking to that plan and trading the system mechanically. Over time, and once you’ve begun to scale up the number of contracts to 4 or more, then it makes sense to consider some techniques that can potentially reduce your risk and improve on the “purely mechanical” results.
So with that said, here are some ideas on different types of discretionary strategies that you might consider:
– In choppy market conditions consider scaling back to just one contract and just shooting for Target 1.
This is the #1 strategy for dealing with poor market conditions.
In a bad market environment where the stops are getting hit frequently, if you trade 1 contract and just shoot for Target 1, the full stop-outs aren’t going to be that bad. We know over a long series of trades T1 will get hit about 75% of the time (it did in 2020 and 2021).
There are basically two types of “market conditions” that are not optimal or conducive to the Momentum System strategy – or trading in general.
1) Extremely dull markets. This is typical around Holidays or in mid to late Summer. These days are characterized by low volume and low participation. These are mostly dull choppy days where it seems like most participants are not at their desks or on vacation. The ranges tend to be very small – you might see the Trigger Range only 3-5 points and the price just seems to drift around with no directional conviction. We had several days in August 2021, and a couple days the week between Christmas and New Year, where no Alerts triggered-in.
2) Extremely volatile sessions. These are typically driven by news events like the Pandemic sell-off of 2020. Every so often (measured in years) the market starts making extreme daily moves and the ATR’s and ranges expand abnormally. In this type of environment the market tends to have days where it moves 1-2% or greater for a series of days. This is when you might see the Trigger Range is 20-40 points and the distance to the Targets can seem astronomical. When the 5-minute ES ranges are 10-20 points, it’s best to back down to 1 Contract and just shoot for Target 1. In March of 2020 there was a day where Target 1 was 30.25 ES points.
– Avoid trading on a Fed announcement day, options expiration or right around the Holidays.
As discussed above, certain periods of time are just not conducive to trading – no matter what type of system you are using. Avoiding certain trading days each year can help minimize drawdowns. If the market has one of those 1/2 days of equity trading (like the day after Thanksgiving) the system will be offline that day.
– Use a tighter initial stop-loss.
If the range is really wide, say over 12+ points and / or the fill is a big distance past the range, consider using a tighter initial stop than the 18 point “fixed max stop”. If you get stopped out, you’ll want to re-enter if the price goes back to the original Entry – but that will help mitigate the damage on an alert where the trailing stop doesn’t have a chance to move. Also when the Range is exceptionally wide and / or the Trigger price is an extreme distance from the opposite side of the range, you could choose to back down to just 1 contract.
The mid-point or 3/4 of the Trigger Range can serve as a good place to use a tighter stop – if the range is exceptionally wide.
– Be willing to sell really close to the targets even if they don’t get hit.
Many times we see the price come within a couple ticks of the T1 or T2 and then reverse. Depending on the distance from your Entry, you could choose to just close the trade and give up a little extra profit – especially if the range is really wide and the targets are significant. If you get Target 1 and then the price gets close to T2, you can choose to go ahead and set a tighter stop than the system stop – or just cash it in close to T2.
– Only take the first 1-2 alerts per session, which prevents multiple stop-outs.
For the most part, on “good days” the first alert of the day is the only alert that session. The price breaks out of the Range early on and never looks back. The market just trends in one direction and goes on to hit both targets.
However there are frequently sessions where the 1st alert hits the stop, the price reverses and triggers a second alert, which goes on to hit both Targets (which typically makes up for the stop-out). It’s the 3 alert days that can do the most damage because the price action has to be extremely choppy to trigger in 3 trades. The system set to issue a maximum of 3 “filled” Alerts per session, after which it goes offline for the day.
An alternative to that strategy
Consider skipping the 1st alert of the day – if market conditions seem choppy or indecisive.
There are occasional sessions where the market makes an early move in one direction – and then reverses and trends in the opposite direction the rest of the day. This is more typical on opex or a day near a Holiday – sometimes the two days leading up to a Fed announcement – Contract Rollover day – or the middle of the Summer Doldrums. The market goes through certain periods where the price action “just sucks”.
To reduce risk during these periods, consider “passing on the 1st Alert of the day” – especially if the conditions seem “sketchy” or indecisive early on. There are sessions where the 1st alert hits the full stop, then price reverses and goes on to hit both targets in the opposite direction. Those trades will essentially cancel each other out, but avoiding a stop-out on a false move can improve results dramatically.
There are periods of time where overall market conditions are not optimal for trading a breakout system. As a result the system performance will experience some rough patches. When you notice the system seems to be taking a lot of stops – and there seem to be more than a usual number of 2-3 alert days – One way to hedge your bets and reduce risk is to scale your position size – in to the 2nd or 3rd alert of the day.
If the 1st alert occurs on the opening drive – the first 10 or so minutes of the session – it’s possible the market is making a false move / fake out – so you can choose hold off and then use the following strategy:
How to scale into trades and reduce your risk
Skip the 1st alert of the day.
Take the 2nd alert of the day with 2 contracts.
Take the 3rd alert of the day (if there is one) with 3 Contracts, holding the 3rd as a “runner”
If you skip the 1st Alert of the day and it goes on to hit the Targets then you simply “missed out”. But on days where there are 2-3 Alerts (the system will only issue 3 alerts per session max) it’s common that it’s the 2nd or 3rd alert that makes an extended move.
The 1st Alert of the day has a much higher chance of getting caught in a “fake-out” directional move early in the session. A subsequent alert (if it happens) has a better chance of catching the primary trend of the day. (In a choppy indecisive / volatile market).
3-Alert days tend to be the worst. This means the market is chopping above and below the Range multiple times and doesn’t have any clear directional bias. A no trend / choppy / zig-zag day. It’s impossible to know for sure whether the 1st alert of the day will just go ahead and hit the targets – or whether there will be 2-3 alerts on a given day. But many times the price action or the market environment will provide clues and it’s not a bad idea to use some defensive tactics when conditions are poor or choppy.
Be forewarned that there may be several “3 stop-outs in a row” days a handful of times in any given year. The strategy of skipping the first alert of the session will improve the results on those days.
Skip an Alert if the “Fill” is too far past the Alert Price
Occasionally the 1-minute price bar that triggers the Entry Confirmation will extend far past the Alert Price. Since we are using the closing price of the first price bar / candle that CLOSES past the Alert Price, there will be times the system gets a fill WAY PAST the Barrier. It could be 5-10 points or greater. It’s fairly rare but it does happen. The result is that the Alert gets filled WAY above or below the Trigger Range and the price is already very extended and has a good chance of snapping back in the opposite direction. Ideally the closing 1-minute price bar that triggers us into a trade (Entry Confirmation) is a couple ticks or even a couple points past the Alert Price – but certain times that price bar might extend significantly past where we wanted to get the fill. In that case, you could choose to set a limit order at the actual Alert Price / Trade Price Barrier – or you might choose to skip that Alert all together. Generally speaking, the wider the range, the more likely you’d want to skip an Alert that fills too far past the Alert price.
Here’s an advanced strategy you can use to help minimize damage on full stop-outs
The main problem with using too much discretion when trading the Momentum System is that there will be plenty of days where you end up shooting yourself in the foot because the price can act weird – or you think it’s going to do something and make a decision to trade it differently, but then the alert ends up working out just fine if you had just traded it purely mechanically. Use discretion sparingly!
As long as the hit rate on Target 1 stays around 70% the system will always remain profitable over a long period of time.