How to Play Your Sweet Spots

26. November 2008
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You spend a lot of time determining your sweet spot levels the night before.  Now how to you play them the next day?
 
It's hard to say which sweet spots ("SS") will get triggered, and in particular, which order.  For example, say you have three SS's (855, 865, and 873 (real world example from 2008.11.26)).  If you enter on the first SS (855), you have to make the decision to either have a managable stop that you are willing to let hit, then take the next higher SS (if it gets there at all), or, make your stop wide enough to encompass all the SS's and add to your position as the higher SS's are hit:

  • If you go the "wide stop" route, then make your stop wide enough to encompass all the SS's (in this case above 873) and add to your position as the higher SS's are hit. In this example, it means enter short at 855, add at 865, and add at 873 (and pray that you finally get your reversal!).  Of course, if the trade just immediately goes in your direction off the first SS, then all is good!  However, if it goes completely against you, you are in for a very deep hit.
  • Or, if a stop that wide is unpalatable, then an option is to ignore the lower SS and go with only the middle or higher SS.  That way if you enter only at the top 873 area you can have a small, 5 point stop (878), for example.  Instead of entering at 855 and having a 30+ point stop to 878!  However, you have to be okay with missing potential profit off those lower SS!  There will always be other opportunities.
  • Or, if you go with the "manageable stop" route, then one idea is to have tight targets as well.  On one contract, +5 points (or +10 point goal, moving stop to breakeven at 5 points).  On two contracts, +5 and +10 points (and going break even on second contract after +5 points).  That way, if the SS turns against you, you got out with some money.  If it goes your way, you get 5+10 = +15 points!  In this real-world example, the 855 broke +20 points, then hit 865 and broke +5 points, then hit 873 and broke +10 points, and then hit 888!  Money management is king.  The wide-stop route would have caused you a killer hit; adding at each level and eventually getting stopped on the whole position.  Very conservative money management could've gotten you, at a minimum, +5 points each sweet spot, for +15 points on the day.  That's still $750 on one contract!
Also, be sure to "Follow Your Plan"!

Lesson

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