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” to consider – when the Ranges and Volatility in the markets are extremely high.
In normal market conditions, the Trigger Range is typically less than 20 ES Points
When the Trigger Range is larger than 20 points, the market tends to be extremely volatile and the ATR’s are very high. Which means there’s a LOT MORE RISK and it makes sense to consider adjusting your trading strategy to compensate for it.
The Alert Software itself is programmed to treat every market session the same. This is how and why it adapts to any type of market conditions and environment. However in real-life it makes sense for a trader to adjust their expectations and perhaps trading style to compensate for different types of market environments.
The “initial stop” always starts off on the opposite side of the Trigger Range. This means if the Trigger range is 30 points, you know ahead of time that if an Alert gets filled, and then the market reverses and moves in the opposite direction – a Full Stop-Out is going to be 30 points – plus the distance from the Range high or low to the Entry price.
With that in mind, you might consider using a FIXED MAXIMUM STOP-LOSS of say 12-15 points during these periods of high volatility.
If you get stopped-out but the System doesn’t – and the price trades back to the Entry Confirmation – you can always “get back in”. But the benefit of using a “fixed max stop” is that you will never take an enormous point stop-out like the system sometimes will. Eliminating a handful of the biggest stop-outs in any given year will improve the results dramatically.
Keep in mind that during periods of extreme volatility, the Targets also adjust to the ATR’s and will be extremely wide. Over the years we’ve seen times where Target 1 was over 30 points and Target 2 was in the area of 80-100 ES points. That’s what you call EXTREME VOLATILITY but it definitely does occur from time to time.
Beware of Alerts that get “filled” way outside the Trigger Range
Another big consideration to keep in mind is the ENTRY CONFIRMATION (fill) on an Alert during extreme market conditions. It’s possible – and we’ve seen it before – to get filled on an Alert say 8-10 points or more PAST the Trade Barrier / Alert Price. When this occurs it adds even more risk of a large point stop-out should the market fail to get continued traction in the direction of the Alert – and reverse to hit the full initial stop.
This generally happens when the market makes a huge opening drive in one direction right after the open. Ideally the “Entry Confirmation” is a couple ticks or even a couple points past the Alert price. But occasionally the market will make an enormous move in the 1-minute we are waiting for the “close past the barrier” in which case we could see a “fill” 8 or more points past the alert price. This is a red flag because the market frequently makes a snap-back move in the opposite direction. The closer the “fill” is to the top or bottom of the Range the better.
Which brings us to another discretionary strategy you can employ during periods of extreme volatility. If the range is crazy wide, say 25 points or more – AND the Entry Confirmation occurs WAY PAST the Alert Price – you might consider passing on the trade altogether. Not taking a specific trade is also a way to reduce risk.
For example, say the system comes online and you see the Trigger Range is 30 points. Immediately you should be aware that the market is in a high-risk, high-reward environment and you want to be acutely aware of that. A losing trade is going to be a LOT of points. The Targets are going to be WAY OUT from the range and if both targets get hit, it’s going to be a HUGE gain. So the system balances the risk / reward, but you as a trader might have some limitations as far as margin or the risk you are willing to take.
NOTE that in extreme market conditions we often recommend just trading 1 MES Micro Contract and just shooting for Target 1.
Over the years, in extreme market conditions we often see Target 1 is “more points” than Target 2 typically is under more normal market conditions. In other words if Target 1 is 10 points or greater, you might consider just shooting for T1 with 1 contract.
Here’s a good example of why that’s a great strategy in extremely volatile conditions.
On 5/11/2022 the Trigger Range was a whopping 29.25 ES Points. (range low 3972.50 – range high 4001.75).
When price broke out of the top of the range, a Long alert was issued at 4010.75 and the Entry Confirmation (fill) occurred at 4014.25.
Since we know that the initial stop always starts off 1-tick past the opposite side of the range (from the direction of the alert) we knew the initial stop was going to be 41.50 points.
Trading just 1 MES Contract makes sense when the ATR’s and volatility is that high.
You can see how the day turned out on the image below:
There were 2 Alerts that both hit Target 1. But neither made it to Target 2. Notice the SIGNIFICANT distance to T2 on both of the Alerts and also note the “distance the price traveled” before it reversed and eventually tagged the “ratcheted” trailing stop.
If you were trading 1 Contract and shooting for Target 1 you would have scored 33.50 points that session.
If you were trading 2 Contracts shooting for both Targets you only scored 5.25 points.
(That’s because the trailing stop didn’t have enough time to move much past the breakeven level)
Keep in mind that even trading 2 contracts, you could have easily trailed the stop much tighter that the system stop and captured significant points. That fist Alert made a move +30.75 points past the Entry and it would have made sense to capture some of that gain if you were trading 2 Contracts – rather than letting it come all the way back down to the “breakeven” trailing stop.
Note that the distance to Target 1 that session was in the neighborhood of what Target 2 would be in more normal market conditions. In other words if it was just a run of the mill typical market environment a gain of 16-17 points on an Alert that hit BOTH Targets would be a good trade.
This is why it makes perfect sense to trade just 1 Contract – and shoot for Target 1 when the market is extremely volatile.
No matter what the market conditions are, we know for a fact 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.
Another strategy to consider during “atypical” market conditions is to “trail your stop at a much faster / tighter pace” than the system trailing stop.
Say the Range is 20 points and the “fill” on the Alert is another 3 points. Right off the bat you know that a full stop-out is going to be 23 points (plus a tick). Assume Target 1 is 11 points and Target 2 is 30 points. Trading just 1 contract and shooting for T1 is perfectly acceptable. Perhaps you might also use the “fixed max stop” of say 15 points. If you were still trading 2 contracts and shooting for both targets (the standard plan) and the price makes it past Target 1 – then it’s perfectly reasonable to use discretion managing the stop on the 2nd Contract. In other words say the price makes it past T1 and goes on to move another 14 points in your favor – it makes sense to “trail a tight stop” and protect as much profits as you can – rather than letting price reverse and go all the way back to the “wide system stop”. We’ve seen many times where price makes a huge move towards T2 but doesn’t quite make it. You risk giving back a LOT of points if you aren’t a little “proactive” in certain situations like that.
Avoiding a handful of the biggest stop-outs will increase your performance dramatically
A few additional observations:
An Alert that fills on the “opening drive” – where the market moves significantly in one direction in the first 10 minutes of the session – tends to be the riskiest.
The first Alert of the week on a Monday morning seems to have a higher chance of hitting the full stop (just an observation).
Choppy days where the market zig-zags above and below the Range multiple times tend to be the worst.
Keep in mind that 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 – when market conditions are “extreme”.
As you know, high risk and high reward go hand in hand. In volatile market the system will experience stop-outs that seem huge in comparison to how most traders think. But on the other hand, there will be trades that make up for the big stop-outs and over time everything evens out – and the system is profitable.
Here’s an example of an Alert that hit both target 1 and Target 2 and then ran an additional +103.50 points past the “fill” by the close of the market (the trailing stop was never hit):
That’s an example of how a “runner contract” can work out and that particular session wasn’t nearly as extreme as the examples I described above.
Everything is relative and dynamic. The system approaches every trading session the same way and adjusts all the parameters of an alert based on what the market is doing at the current time. It adjusts everything based on the current ATR’s and ranges in the market. That is why it adapts to any market conditions and changing environments – and has worked well over the years. And we’ve seen some periods of crazy market conditions over the years, where the volatility is “off the charts”.