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 ES Momentum System employs a “fixed maximum stop-loss” of 18.00 points per contract.
This means the “initial stop” will always be 18 points or less. Any subsequent trailing stop moves will also respect the 18 point fixed max stop. Keep in mind there is no upside limit. The fixed max stop is calculated based on a maximum distance of 18 points from the Entry Confirmation level (fill).
With that in mind, you might consider using a tighter stop of say 12-15 points during 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 a large loss on any given Alert.
Eliminating a handful of 18 point “full 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 full 18 point stop-out should the market fail to get continued traction in the direction of the Alert – and reverse to hit the 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 18 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).
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.
Skipping a handful of Alerts that result in 18 point stop-outs will increase your performance dramatically
Whenever the range is 20 points or greater the “fixed max stop” will be in play. It actually tilts the odds in our favor since there is no limit to the upside potential. However when you see the max stop in place you want to be aware of it and think about playing defense.
How to Play Defense in extremely volatile market conditions
Consider Using Some Discretionary Strategies.
When you see the 18.00 point “Maximum Fixed Stop” in play, you know the market is experiencing unusually high volatility.
You know the “max stop” is in effect when the distance from the Entry Confirmation (fill) to the initial stop is exactly 18 points.
When the Max Stop comes into play – you might choose to “get defensive” because market conditions are not “normal”.
Possible discretionary strategies you might consider when the Max Stop is in effect:
Skip some alerts
– 1st alert of the day on opening drive (first 10 to 15-minutes of the session)
– if the fill is way outside the range (triggering the 18 point max stop)
– day before or after Holidays – the week between Christmas and New Year
– 5-minute price bars are traversing the entire Range
Just trade 1 contract and shoot for T1
– you could choose to do this on the 1st alert of the session
– depending on the price action you could trade 1 Contract and shoot for T2 (proactively managing the stop)
Just trade 1 Alert that session and call it a day.
(The Momentum System will issue up to 3 “filled” Alerts per session)
Use a tighter stop loss than the system
Only take 1-2 trades per day (system issues 3 max)
– skip the 1st alert and let the market session unfold for a bit to see if you want to take a subsequent alert
Scale 1,2,3 contracts for the potential 3 alerts per session max (in choppy conditions)
If price gets between T1 and T2 move the stop up to the Entry or even T1 – if there’s sufficient distance between those levels
– in other words if the price hits T1 and makes it half-way to T2, put your stop at the Entry or T1 instead of using the system stop
Use the 3-bar breakeven stop move on a 5-minute chart:
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, especially if the 5-minute price bars traverse the entire Range.
The Worst Possible Scenario
The Momentum System will issue a maximum of 3 “filled” alerts per day.
There will be occasional (relatively rare) days where the price action is just not conducive to trading the Momentum System. These days can result in 3 stop-outs.
These are “Trend Failure” days where the price action just chops above and below the range – and no trend develops in the market. These are sessions where the price breaks out of the range and fills an alert, but there’s just not enough “traction” for the price to make it to Target 1. Then the price reverses, or just drifts in the opposite direction – and hits the stop.
A handful of days a year – this results in a 3 stop-out day.
While it’s almost impossible to identify these days ahead of time – and “quantify” ahead of time which days will experience this type of price behavior – sometimes you can just tell by watching the price that it’s likely to be a “choppy day”.
If you use some of the discretionary tactics described above to avoid getting stopped-out 3 times in a session (the max) then your results will be vastly improved. We’re always working on a way to improve the system, but sometimes the price action in the market itself – which we have no control of – is just not conducive to trading, no matter what type of system you are using.
The real take-away here is to attempt to use some discretion to avoid taking 3 stop-outs in a session where the 18 point fixed max stop is in effect.
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 some 18 point stop-outs, which might seem huge in comparison to how most traders think. But on the other hand, there will be trades that make up for the full stop-outs and over time everything evens out – and the system is profitable.
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”.