Monday, May 18, 2009

Exits after a Range Expansion in futures trading

Today was an Aha day, with the Nifty moving up 17% with just 55 seconds of trading. What could it do if we traded for full five and half hours?

On a more serious note, I will try to discuss the issue of exits, which causes difficulties and consternation among traders.
First, a definition of range expansion. The market moves strongly in one direction giving a move which is much above average.
As an example: suppose the Nifty has an average movement of 65 points every day. On any one day it moves 195 points in one direction. This is three times the average. It qualifies as a range expansion. I call it an RE bar.
When the market is moving up slowly but steadily, traders can apply trailing stops to manage their exits. These stops can be formed by short term (3 to 8 period) moving averages, parabolic SAR, pivot points (previous high/low). Such stops ensure that the trade is protected, while also trying to capture as much of the trend as possible.
The problem arises when the market makes a range expansion in your favor. Now, the trailing stops become redundant since they are likely to remain much lower than current market prices. In such cases the trader needs to manage her exits without having reliable technical tools. Some suggestions for exit management are:

1. Quick, take partial profits. If you are trading in multiple contracts, take some money off the table.
2. Push your stops close by, below the low of the latest bar. If the market keeps on moving up, you will get the benefits of the move, while protecting most of your open position profits. If the latest bar is the RE bar, then move the stops to the mid point of the RE bar.
3. Have a profit target based on previous resistance. Look at the chart for the past 12 or even 24 months. Is there significant resistance above current levels? If there is, that zone can become the profit taking zone.

Have an open mind, since managing trades when they suddenly move in your favor is more difficult than managing losing trades.


Indrajit Mukherjee said...

Sudarshan Sir,

What's ur take on the day-traders now? Or positional traders those who has not taken position due to election fear?



Tushar said...

My sixth sense says that we are looking at an island on nifty.
So we will have a island reversal.
Q-what is island reversal?
A-One of the most well-known gap patterns is the island reversal, which is formed by a gap followed by flat trading and then confirmed by another gap in the opposite direction.

But I will trade it only on conformation.

Till then we have a trading range to trade.
Let's see if I am right.

Krishna said...

Thanks Sir
I was carrying a long position taken on friday and now your valuable ideas will surely help me a lot in deciding for an appropiate exit.