Constructing a Trade for Maximum Profit

7/28/2019 Constructing a Trade for Maximum Profit

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Factor LLC2 North Cascade Avenue Suite 720 Colorado Springs, CO 80903

Email: [email protected]

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April 3, 2013

Identifying, constructing and executing an asymmetrical trade

On Twitter today I promised to share the chart of a pending trade I currently wake up thinking about eachmorning (about 3:00 AM). So, here goes.

First, some background on my trading philosophy is in order.

There are trades and then there are trades. In my mind, not all trades are created equal. In fact, Imaintain a matrix of the signals I will take. The matrix lists just some of the following information:

Pattern weekly Pattern - daily

Length of patterns

A launching orignition pattern with the larger pattern Trend daily (using a moving average as a proxy) Trend weekly

Any other technical factors

From this information I ballpark the risk I will take on a trade. I have capital segregated for futures and forextrading. I will risk between of 1% and 1.2% of capital on a trade, although under extremely rarecircumstances I might risk up to 2% of my trading capital.

About 5 to 15 times per year I get the highest category trade set up. These are set ups generallycharacterized by:

1. A 12+ weekly daily chart pattern with a horizontal boundary line

2. A breakout confirmed by the daily moving average3. Confirmation by other technical factors COT data, spread behavior, against conventional wisdom

Once I identify such a candidate market my mind becomes focused on how I can construct a trade that willproduce a return of 5% to 10% or more on my entire trading capital. I never calculate risk or reward againstmargin used for the trade itself, the value of the underlying commodity contract, % of price change or thelike. Risk and payout are always measured against total trading capital. In other words, per $1M of tradingcapital I am willing to risk $10,000 on a high quality trade, hoping for a gain of $50k to $100k.

As a general rule, on a 1% risk trade I will assume a position of one futures contract (or 100,000 primary inforex) per $100,000 of capital, or 10 contracts per $1M. But depending on how the trade develops I mayonly be able to put on 5 or contracts per $1M. I try to stay alert and anticipate how I might establish aposition of 15 contracts for the same 1% risk. This is where timing becomes so important.

I see a 10% gainer coming in the Australian Dollar futures (or the AUDUSD spot forex). Here is the set up.

On a weekly chart the Aussie is forming a massive and clearly defined 2-year symmetrical triangle on theweekly chart. Please know that I don t care if this is a continuation or reversal pattern I just want to be inon the trade.

The solid boundary lines define the orthodox highs and lows of the pattern. The dashed lines define theweekly closing prices. I draw both types of lines in on major patterns.


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Of extreme interest to me is the 8-month rectangle that is forming in the late stages of the thetriangle. I far prefer horizontal bounary lines (rectangles) in contrast to diagonal boundary lines(triangles).

My experience is towait for a breakout.Earlier in my carrer Iwould always try toget pre-positioned.This led to beingwhiplashed within apattern, only to begun shy when thefinal and decisivebreakout took place.

The daily chart moreclearly shows therectangle. This is thepattern I will key offof. But I am in noimmediate hurry.


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For me the challenge is tactical implementation. At the present time my plan is to buy 5 contractsper $1M at 1.0571 stop and another 5 contracts if on any day the market is trading at or above1.0571 at about 3 PM MST. This is what I consider to be the closing price.

I will risk about 106 points per contact although how the market breaks out will fine tune thisdetermination.

The best scanario for me would be if the market can rally to the upper boundary line of therectangle, stall, and then pause for a week or so. This will allow me to fine tune the trade in hopesof taking a 15 lot position per $1M.

No market every unfolds as I imagine it will. A trader needs to review a set up every day. Therectangle has a target of about 1.1060. I would take profits on half my position at this level. Thetriangle has a target of about 1.22xx. I would hold out for this level on the other half.

I am not a believer in trailing stops unless the charts show me a good reason to becomedefensive. Within an uptrend my bias is to sell strength and buy weakness. So, why would I wantto sell weakness by using some automatic trailing stop.

A word to novice traders is in order. I believe large profits are attained by holding a position, notby active trading. You need to be willing to ride a market all the way back to the starting gate inorder to realize a large profit. It is emotionally tough to give profits back on popcorn trades. Butthis is the cost of realizing a 1000 to 1500 basis point profit on an indivudual trade. Anyway, this ismy opinion for what it is worth.

If I can gain a position of 15 contracts per $1M, I stand to gain as much as $140,000 for a $10,000risk. This is what I call an asymmetrical trade.

I dont use indicators. I dont care about Elliott Waves. I cannot even spell fibonachi. I love movingaverage, depending upon how they are used (a subject for another year). I trade patterns andprice. Patterns and price. Patterns and price.

P.S. I had gone into relative blog hiding for a number of months. My schedule has allowed me tobecome active for a week or so. I will soon be going into deep slumber. Sorry.( : -( )

Constructing a Trade for Maximum Profit

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