I did not see strong selling and decided to open a 1/2 long, with a stop around $100, which is well below the $105 support area. I hope that this support area will hold. We can see in the second EV Figure that there was stronger selling later in the day.
A stop at $100 implies a 6.73% loss on the position. This is a little high for me. Hence, I might exit at a higher price (for example $103) if the EV pattern is still negative today.
Below is the EV pattern at 4:08 PM the time of the trade.
This is the EOD EV pattern.
I also placed a short IBB when I detected a negative MF against the price.
Stop Management
Let's come back to my stop management policy, which is explained here:
http://www.effectivevolume.com/conte...vember-23-2015
What is a stop? A stop is a way for the investor to get out at a fixed price level that he considers to be the max possible loss that he can endure. Most trading books will tell you that stop loss is a critical trading tool. I do not agree with this assessment. It is important to understand that the market does not care about me, about my positions and my stop loss levels. If I show my hand and publish a stop level, it is to my disadvantages as algos will easily trick to bid-ask levels in order to run my stop.
This means that my stops are always virtual stops and not fixed stops. I only place fixed (but hidden) stops when I have to leave the trading desk for a few hours or a whole day.
Let's for example take ACIA. When I entered the trade yesterday, I knew that there was a support area at around $105. I bought at $107.21, but we can see that the stop level indicated in the Table below is $100. This does not mean that I will wait for that level to be reached. Also, since it is not a hard stop, if ACIA opens today at $99, I will not sell, but will wait and see how large investors act.
Statistically, this level has 23% chance of being reached in the next five days. This probability is calculated every day, based on the price volatility and on the last closing price.
Now, $100 is probably the worst level to use as a stop, because everybody knows that this is a natural "line in the sand." This means that if we come close to $101, we will certainly drop below down to $99-$97 as algos will "run stops." This is the market reality. This is why I will probably have to take a decision at around $103 (just below the $105 support zone) to exit or keep the position. Eventually, if we drop to $98 I might decide to increase the long position, especially if I see that EV is positive.
It is here that the measure of the position in terms of portfolio risk is important. a $100 stop level on a 10% position implies a portfolio max drawdown of 0.66%. This is acceptable, because ACIA is a long position and the portfolio carries a -1.43% max drawdown linked to short positions. In fact, I could increase the ACIA position at $98 (with a stop at $95) and still have a portfolio that is relatively balanced.
Let's see how this works: below are the current stop levels. Before acting on ACIA, I notice that the GPS probability to hit the stop in the next five days is now 0%. This means that I can easily move this stop level without really hindering the probability much.
Let's do it and push the stop level down just above the closest resistance level.
We can now see that the GPS new stop levels decrease the max DD on the portfolio. This is good!
You will note in the Table below that the stop on GLD is at the entry price. This allows me to keep the position as a tool to balance the portfolio max DD, because GLD is a defensive position (equity risk-off type of trade.)
Let's come back to ACIA and let's suppose that today, algos run down the stops to $98, but because EV is positive, I decide to buy another 1/2 position. This means that I would carry a global ACIA position with an average entry price at $102.61, but I would need to lower the stop level down to $95. With this decision, I would carry a max loss of 7.41% on that position, with a max portfolio DD (based on yesterday's close) of 2.26%. However, because the GPS/IBB and GLD positions balance that long ACIA trade, the total max DD on the portfolio would be -1.04% (circled in Red.) This is an acceptable level.
Trade ideas for today
The trade ideas for today are below. Since I expect a bounce by Friday, I believe that we need to buy oversold stocks/ETFs if possible.