Simple S/R based intraday ES strategy -- comments?

Discussion in 'Strategy Development' started by DeepThought, Dec 30, 2008.

  1. Based on few weeks of reading and playing with ButtonTrader/IB simulation mode, I've come up with following simple strategy. It is by no means revolutionary and it is based on the kind advice of many contributors, especially ESResistance from ET and BillyRayValentine and Ironman from ForexFactory.

    It's basically A simple method for fading moves at previously identified support/resistance levels. Finding the S/R levels and deciding which ones to trade is completely discretionary. Trade execution is mechanical and automated once entry points are selected.

    Strategy goes all-in at entry and scales out as trade progresses.


    Before day starts, look for S/R lines and zones on daily, 60 minute and 15 minute charts of the previous 3-14 days.

    When price approaches a S/R level, decide whether to fade the move or not. There are no hard rules for this, but some guidelines I follow:

    - If the S/R level has been 'used' a lot lately, it is more likely to fail
    - If the S/R level has failed recently in the same direction, don't take the trade
    - If the move has gone for along without significant rebound, take the trade


    Enter with 3 contracts. All orders, including targets and stops are entered in advance.

    I usually enter limit orders one tick above/below the S/L line, or fine-tune the entry based on price action and DOM.


    #1 Target is at entry +2 points, set as limit order at entry
    #2 Target is at entry +4 points, set as limit order at entry
    #3 Has no set target, will be closed when trend changes (visually) or at the end of the day.


    Initial stop for all 3 contracts is 1.5 points from entry.
    When #1 target is filled (at +2 points), move #2 and #3 stop to breakeven
    When #2 target is filled (at +4 points), move #3 stop to +2 points


    Risk/reward depends on which targets are hit:

    - All stopped out, risk of 4.5 points
    - Only 1st target met: Reward of 2 points (2+0+0)
    - 1st and 2nd targets met: Reward of 6 points (2+4+2)
    - 3rd target closed higher ... anything goes :)

    Conservatively assuming that 50% of the times the strategy fails (all 3 stopped out), 20% reach only 1st target, 20% the 1st and 2nd target and 10% go to +6 points, the average gain of the strategy is 1 point for 3 contracts traded.

    Slippage should be almost non-existent on entry and target as limit orders are used. It can happen in stops. If I account for that, the average gain is 0.5 points.

    This is not too impressive. How to improve it?

    - Improve odds by selecting higher probability entries
    - Use indicators to identify high momentum
    - Optimize target/stop levels
    - ???

    Comments? Help? Ridicule? :eek:
  2. PetaDollar

    PetaDollar Moderator


    You will need to estimate the probabilities by giving yourself a blind test-- identifying S/R levels then scrolling the chart to the right and see how things would work out.

    Once you estimate these probabilities you can determine what size to trade based on account $.

    Keep track of actual performance as you go and compare actual probabilities to your estimates.
  3. PetaDollar

    PetaDollar Moderator

    Here is a weakness. You need hard rules. Easiest to start with just inputting a direction associated with each S/R level (trade bounce or breakout).
  4. Everything sounds pretty good except for this part:

    "Initial stop for all 3 contracts is 1.5 points from entry."

    When I started trading futures my stop was exactly 1.50 points away and the market was nowhere near as volatile as it is now. My stops got triggered over and over on profitable positions. Long story short, I started placing my trigger where my stop was and my results improved dramatically. After that I started moving my stop farther and farther away and my results improved even further. I place a stop on every trade I take but it's a large distance away from the price. The only reason I place it is so I can move it up or down as a trailing stop when the position is showing a profit, or as a stop in case I have to step away from the screen for a while. It almost never comes into play. I just don't like the idea of leaving profit or loss to the market by placing a tight stop.

    Bottom line, you gotta find what works for you but I've yet to meet a successful trader who uses a tight stop. When the volatility picks back up you're gonna get whipped out of trades left and right.
  5. Thank you for the insights, good stuff!

    Hmm, good point. I've been doing this real-time for the past two weeks, but I've been tweaking with the system and trying out different things, so the results are not meaningful.

    I'll backtrack 2 weeks and see how the system performs with 2-3 different stop/target levels. Phew. I've got my work cut out for the long weekend :)

    I'm sure that with hard rules the performance will not be best possible ... but I guess until I have enough experience and good feel for the market it's better to remove all room for confusion.

    How about this: I start by (manually) back and forward testing the system with hard rules and different target/stop sizes, and see the results.

    Then look at the failed trades and see if there is any pattern, e.g. "if S/L failed last time, it will probably fail again this time, so don't take the trade" and keep adding rules based on that.

    ... and of course then the market changes, and nothing works anymore. Rinse and repeat :)

    == DT ==
  6. Ewww... I have a STRONG dislike for wide stops. I've been swing/position trading equities for few years and I like my stops tight and nice. On the other hand. I get stopped out a lot. Too much, actually. So I think you have a good point there.

    I'll take a deep breath and start loosening those stops, to see how it works. One painful tick at a time :)

    == DT ==
  7. Lucrum


    I saw a study of stop placement somewhere a while back that suggested "wider" stops were generally going to improve results. Wide being a subjective term and of course I'm sure tight stops do work for certain strategies.

    A 1.50 stop on the ES using a 15 min or longer term chart is imo pretty tight.
  8. richardm


    Interesting support / resistance concept - - what criteria are you using to determine levels (N # of ticks, candles, etc.)? What I am curious about is how this might work with the market profile. I have database and programming experience and would like to apply this to futures markets. Thanks in advance...
  9. Redneck



    IMHO - Good Plan sir

    Suggestions - Maybe try 1 or 2 EMAs (just to keep track of current price direction), and track ATR (on the time frame your trading) to help figure out optimal stop placement - The ATR will show the normal breathing (price movement) you might expect

    And please use a journal so you can go back and fine tune your approach

    Good Luck
    #10     Jan 1, 2009