The Week
The overall objective (other than to secure more ‘R’) was to keep to the system and trade high probability setups, however I was also interested in watching some numbers that had got me interested lately: MAE/MFE. I was curious to see what they might reveal and maybe give me a boost of confidence.
The main highlight of the week was being able to pull off the perfect trade (well a textbook trade) which locked in +1.6R. Sweet.
The Numbers
- 5 trades, all short positions.
- Final week’s R of +2.28R with a 40% win rate: my winners outperformed my losers.
- MAE/MFE:
- Winners: average MAE of 0.13R, meaning time was good and trades barely moved against me and I was hardly underwater. MFE was solid with an average of 1.85R.
- Losers: average MAE of 0.47R and MFE of 0.15R. None of these trades ever showed a chance of winning. It seems for losing trades, there was really not much upside in these trades and I was mostly just wrong.
- So far when I’m wrong, I’m wrong (duh), but more like in this sample of trades, when I’m wrong, I was never really right and didn’t give back to the market, where the trade and price reversed on me.
The Trade
This week, I took the perfect trade: a mean reversion setup that I closed for +1.6R.
It was perfect not because it was a winner (it wasn’t even the largest win this week). It was perfect because all the criteria were met for a textbook mean reversion trade.
Market structure
Price was ranging nicely and bouncing between $65,000 and $64,400 - not a huge range by any means, but very importantly, it was established, with repeated touches and clear reactions at both extremes.
This range had also formed off the back of an upside continuation during the previous New York session. This was important for context as without any news, I considered further continuation during Asia/early London sessions to be quite unlikely.
Catalyst
As price approached my marked resistance, my alerts went off so I started watching charts a little more closely and saw pricing bouncing around the 65K mark. Shortly after, I saw my system’s best friend: volume spiking right at my level of interest. Price had popped through the 65K resistance momentarily which meant a meaningful increase in market participation.
Volume on my exchange was 6.5x calculated median levels for the session so this was getting interesting (more volume = more excitement).
At this stage I was looking at three things:
- Open interest: spiking and showing that new positions were being opened with plenty of breakout longs right at the top of the impulse candle.
- Liquidations: short positions needing to cover positions (i.e. traders who were front-running with shorts at 65K)
- Delta: extreme delta shifts on either side of the impulse candle showing aggressive participation at the level, again good.
Combined, these data points indicated to me that breakout long positions could very well be trapped if price didn’t push higher very soon.
Execution
I placed a limit short order at $64,950, close to the market price and got filled. From an execution standpoint, I was willing to chase entry slightly if needed as I had plenty of confluence for the short.
Invalidation was straightforward: $50m in long positions were trapped, so price really shouldn’t reclaim that level, so that is where my stop went above. The target was very clear: the other end of the range which offered +1.6R potential. (I typically want reversion trades to be able to take +1.5R). It was good.
Management
With my trading right now, I’m really looking to hold on to my trades and only discretionary exit if I see market structure break against me or new orderflow information present itself.
This trade moved fast enough quickly hitting my milestones of +0.5R, +1R and full TP in fewer than two 15-minute candles. I limit closed my short position and wrapped up the day before New York session (which I considered to be untradeable due to US monthly PPI figures and Warsh “testifying”).
I try not to get emotional in trading. But this one made me happy.
Lesson
While this was the perfect trade in a textbook sense, the main takeaway from this is to properly list out what separates this A+ trade from any other. Maybe even tagging them as S-tier setups.
If I can get a large enough sample size of these trades showing high expected value, then this offers a real opportunity to size up on such trades with more confidence.
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