Mastering the Trade by John F. Carter

Author:John F. Carter
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2012-07-14T16:00:00+00:00

What Are the Trading Rules for Sell Fades (Buys Are Reversed)?

1. I have studied three different setups that I have learned from other traders and have modified to fit my own trading plan and style. Let’s look at the parameters I use for this “extreme emotion” play. I take trades only between 10:00 a.m. and 3:30 p.m. eastern. A lot of sporadic action can happen during the first and last half-hour of trading. I like to let the markets settle in before I take trades.

2. I play tick fades in two markets, the E-mini S&Ps (ES) and the mini-sized Dow (YM). These can also be played in the SPY, DIA, E-mini Russell, E-mini Nasdaq, and any stocks that are mirroring the action of these indexes. For option traders, it is perfectly okay to use options on the SPY to do this trade. Of course, you should choose slightly in-the-money options when doing this. My preference, of course, is options with a delta of at least 0.70.

3. When the ticks reach +1,000, I short at the market. I like to set audio alerts for +1,000 and –1,000 readings. That way, I don’t have to stare at the chart. If the ticks get to +988 and fall back, I don’t take the trade because I won’t hear my audio alert. This keeps the setup clean and very specific, and not subject to trader interpretation.

4. For the YM, I use a 30-point stop and a 20-point target. I also set a time limit of 35 minutes on this trade. If my stop or target isn’t hit within the 35-minute time span, then I exit my position at the market. I like to use a timer with a beep so that I’m aware of when the 35-minute time limit has passed. Most traders have very little sense of time when they’re in a trade.

5. For the ES, I use a 3-point stop and a 2-point target, as well as the same time limit.

6. If I am stopped out twice in a row on this trade, I am done with tick fades for the day. By “stopped out,” I mean that my physical hard stop is hit, as opposed to the time stop. Note that it is on these days that I will switch to a “go with” strategy, which I will talk about later in this chapter.

7. If by 12:00 noon eastern the ticks have spent more than 85 percent of their time above zero, I will pass on all other tick fade plays for the day. This shows an extreme level of buying in the market, indicating that funds are accumulating stocks. These “power days” are rare, but they do happen about once every four to six weeks. They are accompanied by many extreme tick readings above 1,000, typically between 1,200 and 1,400 ticks. In addition, if it is past 10:00 a.m. eastern and the ticks have all been one-sided, for example, all positive on the day, I will wait until the ticks have spent some time in negative territory before setting up the first tick fade play.

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