A few days ago I was leading a conference call of some remote day traders. One of the questions was: “How do you determine when to try a trade more than once at a level”? I simply answered: “When the risk/reward says it’s okay.”
Playing whack-a mole at a level can be frustrating and you have to be careful that you don’t start to engage in revenge/battle trading. I guard against this by making sure that my realistically expected risk/reward says it’s okay. If I believe that my risk is 10 cents but my target is $1.50 playing whack-a-mole could make sense. Why? Using my back-of-the-napkin calculation I’m getting a 15 to 1 r/r in the trade. If I lose 10 cents the first try, if I try again with risk of 10 cents I am still getting better than 7 to 1 r/r. This r/r makes it acceptable to me. In the markets today there are various reasons—HF robots, widely disseminated levels, etc.—why things don’t trade as cleanly anymore, so it’s important to be mindful of them.
Day trading with the high frequency robots running amok requires the patience to wait for high risk/reward setups. As a professional day trader there is no sense in my complaining about it. Instead, just find a way to trade it. I find that this simple “dime for a dollar” strategy helps me. So what are you doing to successfully play whack-a-mole?
Jeff Davis @Shaq48_Trading
10 Comments on “When to Play Whack-A-Mole with a Level”
What you lost on the first trade is a sunk cost. It is irrelevant.
It does not make the second trade a 7-1 trade.
I agree. As Mike says “One Good Trade”
How many times would you take this level as a new trade? 3 or 5? In what way do you re-calculate probability of the trade working? Each time it doesn’t work the probability is changed, but you don’t consider this? At a specific level, especially an important one, the trade can get crowded in a hurry. What tells you to change how you approach that level?
The game has turned to crap. Why not just admit it?
Because I adapt and can still come to work everyday and find great day trades. Trading is about the ability to adapt and assimilate the info and use my edge to exploit it. I can find opportunities everyday. I still think its the greatest game going.
How many cents do you typically use for your stops Jeff?
I like to call myself a “dime for a dollar ” guy. I look for setups with a minimum of 5 to 1 but search hard for 10 to 1 and better.
Jeff, thank you for posting this. I was only an email or two away from writing to Bella regarding a similar situation. Let me try to paint a setup (been struggling with this concept):
XYZ is coming up its $30.40 level. It has consolidated for 4-5 days each time building up to that level but never quite getting through. Today it finally gets above that level. And the last higher high on the 5m chart is about 30 cents lower. Upside is at least $1 so to you 3:1 isn’t bad (assuming you place your stop underneath 29.70). Is this the right place to set your stop?
If you get stopped out and it gets back above $30.40, how do you play this? Or do I now avoid it since my risk/reward on that same level no long makes sense (I just learned something new from your post!!!).
Here’s another picture. XYZ has a strong opening drive of $1 from $30-$31. It’s having a hard time getting above $31, but is holding high with a flag from $30.80-$31. You take the trade when the offer decrements on $31 with an expected upside of at least another .75 to a $1. Is $30.79 the best stop? Or do you bail once no bids show above $31?
Thanks again, Jeff. Looking forward to reading more.
Jay from KTG
Jay,
First example.. I drill down further for the day trade. I don’t trade off the 5 min, I will use the 1 min and read the tape to find my entry. I use 5 to 1 as a minimum which I would most likely be able to find by drilling down into the tape. In your second example if your reading the tape and have identified a buyer at the 80 cent level you should be long just above that making risk very small..then on a hold over the figure you should be finding a way to get bigger. What is a 3 to 1 trade to a chart trader can become much better risk/reward to a tape reader. Also you have to distinguish if these trades are strict order flow trades which don’t really require knowing where and how the SPY is trading. If they are technical based trades the overall tape needs to be considered with the order flow. I will write about this in the near future. Tape reading skills take time to build but are well worth the effort. I use the 5 min chart heavily in most of my technical trades but always drill down for entry. Thanks for the questions. Good luck in your trading.
Jay,
First example.. I drill down further for the day trade. I don’t trade off the 5 min, I will use the 1 min and read the tape to find my entry. I use 5 to 1 as a minimum which I would most likely be able to find by drilling down into the tape. In your second example if your reading the tape and have identified a buyer at the 80 cent level you should be long just above that making risk very small..then on a hold over the figure you should be finding a way to get bigger. What is a 3 to 1 trade to a chart trader can become much better risk/reward to a tape reader. Also you have to distinguish if these trades are strict order flow trades which don’t really require knowing where and how the SPY is trading. If they are technical based trades the overall tape needs to be considered with the order flow. I will write about this in the near future. Tape reading skills take time to build but are well worth the effort. I use the 5 min chart heavily in most of my technical trades but always drill down for entry. Thanks for the questions. Good luck in your trading.