The 1-2% "K" and I pay on commissions and average slippage compared to an average of 10% for the day trader and 20% for the scalper easily make up for losses on these types of outliers. It can also go the other way as well.
As "K" mentioned effective money management deals with these outlier risks you identify. My risk is 0.5% per trade so I'm very comfortable with the additional outlier risk. Besides, the loss from that move you identify is really quite small for a stock swing trader. I've been in some stocks that have gapped down over 40% and taken the loss at the open.
On the other hand, I think the majority of retail traders scalping or day trading the ES day after day face a difficult task as it's littered with seasoned professionals with extensive trading experience often spanning a career of 20 years+
Last edited by djkiwi; December 22nd, 2012 at 12:09 PM.
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This is going back a bit, but I noticed your silver trade and I looked at the volume. You mentioned that you use volume, but as a secondary and perhaps minor extent.
The chart shows huge volume, historically high in fact on the data I have, when the price went to $50. High volume on an up bar, especially after a long move up, indicates that the smart money were using the demand to unload (sell) into the unsuspecting buyers, who have come into the market when it was in a frenzied state of bullishness.
The smart money were distributing in bulk, which will be done only if they see no further upside and they want to switch from being long to short. It's easy for me to say this now, after the facts have been revealed, but the volume was telling the story in real time.
The situation will change when you start to see signs of capitulation from the longs after a move down, which is seen as high volume down bars. These are times when the smart money are accumulating in anticipation of higher prices. The market may go down more and the change in the supply and demand is signalled when the volume on down bars goes low at a price level where it was previously high, because the supply has dried up. That the time to look for the market to rise.
On the weekly silver chart, there was ultra-high volume on the down bar in the week after silver hit $50, but that is supply. The wide spread of the bar shows that the volume pushed the price down considerably. If the spread had been narrow, it would imply that someone was buying into the selling and that would explain why the spread is low. But when you get a wide spread down it can a manoeuvre to trap in the people who went long at the highs. Consider that a fast move down does not give traders mush time to get out and many will hang on with false hope. If the market went down slowly, there would be more chances for the longs to get out and that would be bad for the smart money, who do not want to buy at high prices.
You can see the volume going down on the down moves prior to be bounces up from the 26.245 level, and that indicates that supply was drying up at those times.
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I recommend that you take a look at volume spread analysis (VSA) you can either learn from books or your can buy software. I have the plugin for NinjaTrader, but you don't need it to spot ultra-high volume and you can do much with the books, some of which are free.
You can get a free VSA eBook from TradeGuider. They will send you marketing e-mail, but its not excessive.
Lastly, on charting software and you may know already, but NinjaTrader (NT) is free to use with free EOD from Kinetic. That includes the EOD data from the futures markets, which may be better than using web based charts when you don't have TradeStation. I did not find using NT immediately obvious and it took me a while to work out how to add data to a chart, but once you are past that stage it is easy to use. The Kinetic data feed is really IQ Feed data under another name.
Last edited by pawnbroker; January 1st, 2013 at 02:39 PM.
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