Straddle That Future

[Dinerotrader 10]

I have been considering doing some research into the following trading strategy for futures and I wondering if anyone could share their wisdom or past experience with this idea.

 

Basic trade strategy set up

Step 1: identify relatively strong resistance or support.

Step 2: Straddle the S/R level with a sell and buy stop order once price gets reasonably close to either bouncing off S/R or breaking out.

 

A buy stop would be placed a few ticks above a resistance level with a stop loss below resistance

 

A sell stop would be placed a few ticks below resistance level with a stop loss at the same place your buy stop was placed.

 

I always like visual aids so here is a quick chart to illustrate how the entries would be used around the support level. It is not a perfect example but you get the idea.

 

The obvious idea is that price should reverse or breakout of that level so you are hoping to grab the larger move with a small loss on whichever side proves to be wrong. If price reverses as it hits resistance, your buy stop will not be triggered so you will not have any loss if price just reverses down. If price breaks through resistance your sell stop will have triggered but will stop out just as your buy stop executes so you will take a small loss which would hopefully be over shadowed by the momentum of the breakout.

 

I haven't gone through much testing on this yet but my guess is that the main issue with this strategy will be avoiding getting stopped out if there is chop at the S/R level.

 

IMO, the largest problem with making money in the market is the chop of the price. If the market moved in longer waves up and down without the chop, it would be easy to cut losses when you bought at a turn in the swing and let the runners run. Given this simplified analysis, my thought was how can I find a place in price movement that appears to have the least chance of being full of choppy prices and S/R seems to lend itself quite often to this. I have watched price completely reverse or blaze right through a resistance level so many times.

 

I haven't heard this idea discussed much so it probably has some major problems which I am not seeing at the moment. I'd appreciate your insights before I go and spend a lot of time considering this strategy. Let me know if this makes enough sense to discuss.

 

Thanks.

[sep34 10]

One approach, with the general idea that you have described, is to use options-- a straddle or spread option etc..

something you might want to look into if your interested.

notably, not exclusively, these strategies are used durring the earning season as volatility is an important factor in the option strategies mentioned. Not to mention that volatility is important to any viable breakout, low volatility periods and chances of being whipsawed are higher.

Edited September 29, 2009 by sep34

[Dinerotrader 10]

Currently, I am not pursuing options for a variety of reasons however I am aware that options have a strategy called straddling. My interest is in using this strategy for futures or equities.

[Dinerotrader 10]

So here is one I was watching progress today. This would have worked great with this strategy. Resistance appeared significant based on the major swing which touched resistance twice and then reversed down. The first pic is where I would have had my short filled and the second pic shows what happened after it. The breakout buy stop could possibly been filled filled since the tiny move above the resistance line was made but it would have been a close one. It depends on how far away from resistance I put my buy stop.

 

Short side

Here is how I might put in the short side of that order. If price hits 21.42, trigger an order to put in a sell short market order at 21.38. If that short is filled, a stop loss would be put in at 21.48.

 

Long side

Buy stop would be entered at 21.50 with a stop loss at 21.38 (I know that is a close stop loss but I am only interested making this trade work when price is moving in one direction or another). I will take a loss if price starts to chop around S/R.

 

Prices and order mechanics

21.52

21.50 - Buy Stop

21.48

21.46

21.44 - THIS IS RESISTANCE

21.42 - trigger 1 - enter trigger 2 order

21.40

21.38 - trigger 2 - sell short order / Stop loss here on if the buy stop filled at 21.50

21.36

21.34

 

I don't know my short sale rules and laws all that well, but it is possible that this type of strategy is illegal for stocks, I just don't know. It might only work with futures or currencies. Let me know your thoughts.

 

[brownsfan019 17]

 

Here's a potential issue that I see - when price consolidates (aka chops) around your entry level. You may need to buy/sell/buy/sell before the move occurs.

 

IMO if you are going to trade as you've illustrated here, you need to read Thalestrader posts and get some ideas on how to execute trades like this. You need to take a stand, draw your line in the sand and let it go. Either works or doesn't.

[Dinerotrader 10]

I am certainly a major student of Thales. It is because of his posts that I came to consider this idea. I see that you agree with my my only real issue with this stategy which is consolidation around S/R. This is certainly the downside. The next questions are:

- How often will that consolidatiion take place?

- Is there a way to anticipate whether or not there will be consolidation at S/R so I can skip on that particular trade?

 

I certainly would not buy and sell multiple times. It would be a one time shot.

 

Thanks for your post.

[brownsfan019 17]

I am certainly a major student of Thales. It is because of his posts that I came to consider this idea. I see that you agree with my my only real issue with this stategy which is consolidation around S/R. This is certainly the downside. The next questions are:

- How often will that consolidatiion take place?

- Is there a way to anticipate whether or not there will be consolidation at S/R so I can skip on that particular trade?

 

I certainly would not buy and sell multiple times. It would be a one time shot.

 

Thanks for your post.

 

How often - your guess is as good as mine. 2 schools of thought here... 1) If it's true S/R it should act like that and just go or 2) since it is S/R there will be a lot of defending going on by bulls and bears so some chop could ensue.

 

Anticipate chop - my way of avoiding chop is to not take trades after a few hours that particular market has been open. In other words, if trading the ES, I'm done w/ that thing no later than 12pm EST. Usually sooner. That's my way of avoiding the lunch time drag and a possible afternoon chop session. For me, I've found 3 cycles and I focus on cycle 1.

 

With that said, you'll have to find what works for you and your methodology. I do not trade the same way Thales does in his charts so my ideas here may not work under those conditions.