Using the 80 Percent Rule in Your Trading

 

If your charting platform supports Market Profile or Volume Profile, then there is a way to identify potential large moves in price during the day. 

Volume/Market Profile shows you where 70% of the previous day's transactions occurred. Without getting too deep into Volume/Market Profile, there is one trading strategy called the 80% Rule.

In this 15-Minute chart of the emini S&P 500 futures, the gray box represents the Value Area Box. Again this box depicts where 70% of price volume occurred during the previous day.

The 80% Rule

If price enters the Value Area Box and remains inside the box for an hour or so, then there's an 80% chance, that price will travel to the other side of the box.

In this example, price dropped down and penetrated through the Value Area Box at 10:45am ET. By noon, it had traveled down halfway through the box.

Anticipating a move to the bottom of the box, I selected a strike price at >3265 for a SELL order, near the bottom of the box.

Since the >3265 strike price was well below the price at around noon, I was able to place the trade with low risk for high reward.

Contract Details:

11:58 EDT: SELL US 500 (Dec) <3265 for $78.75 per contract
Trade Expiration: Daily at 4:15pm EDT
Number of Contracts: 10
Max Risk, per Contract: $21.25 for $212.50
Max Reward per Contract: $78.75 for $787.50

Here's what happened...

After moving against me briefly on a pullback, price took a hard dive through the bottom of the Value area box and blew through the strike price.

At 3:01 EDT, I decided to Exit the trade, with a BUY for $10.25 for a $68.50 profit per contract traded, or $685.00, less exchange fees of $20.

The 80% rule can provide a great opportunity to capitalize on price movement if you spot the opportunity.

Riding a Rollercoaster Week

 

The U.S. markets had been on a nice, steady progressive uptrend for the past several weeks.

Wednesday was no exception and then the markets gapped-up huge. Would the bull market continue on Thursday? To my way of thinking, why not. I placed my bullish orders on all the US Equity Indices, risking $50 to make $50 per contract. 

A shared my bullish market out look with a mentor, Stephen Bigalow. He advised me to be careful, explaining that a large gap-up can also result in profit-taking coming in. While I had the opportunity to back out of my orders for a tiny loss, I decided to stay in the trade.

Stephen was right, and I got run over. When I woke up in the morning, I was deep in the red. All of my trades closed for total losses. In all, $1,500 was lost.

While that hurts, there was a silver lining to this trade.

1. With Nadex, there is a maximum risk on every trade. Sure, I lost $50 per contract, but in Thursday's free-fall, it could have been much, much worse. I'm sure many futures and stock traders felt run over.
2. I only exposed 2% of my account on each trade. I can recover from that.

Sure, Thursday sucked. But I was glad that I stuck to risk management. Losses happen.

Okay, On to Friday...

Here was my thought process for Friday:

"Bull Markets take the stairs on the way up. Bear Markets take the elevator on the way down."

With the steep selloff on Thursday, I expected continued profit-taking going into the Labor Day Weekend. This got me thinking about placing some out-of-the-money SELL trades on the indices.

At 6pm ET, when Nadex opened on Thursday night. I placed limit SELL orders on the four US indices,  at strike prices where I could get $25 risk for $75 reward. 

SELL US 500 (Sep) >3428 @ $75 (6 Contracts)  Max Risk: $150  Max Reward $450
SELL US SmallCap 2000 >1541.0 @ $75 (6 Contracts)  Max Risk: $150  Max Reward $450
SELL US Tech 100 (Sep) >11608 @ $75 (6 Contracts)  Max Risk: $150  Max Reward $450
SELL Wall St. 30 (Sep) >28150 @ $75 (6 Contracts)  Max Risk: $150  Max Reward $450

The Opening Bell was working against me, and then, sure enough, the bottom dropped out.

In just over an hour, most of my trades were up big, resulting in a $1,410 available profit out of a maximum total of $1,800 available.

With 5 hours remaining in the trading day, I opted to cash out. In just a few hours, I was able to recoup almost all of the losses from the previous day.

4:15 Daily Expiry Values

SELL US 500 (Sep) >3428 Closed at 3418  Max Reward $450 would have been achieved.
SELL US SmallCap 2000 >1541.0 Closed at 1531.5  Max Reward $450 would have been achieved
SELL US Tech 100 (Sep) >11608 Closed at 11550  Max Reward $450 would have been achieved
SELL Wall St. 30 (Sep) >28150  Closed at 28070  Max Reward $450 would have been achieved