Today was the cleanest setup for pyramiding futures that I have seen and traded. (Typically I see them after the fact.) It resulted in $300 profit, never risking more than $20 at a time, trading on 1-minute and 5-minute charts.
Today’s S&P opened with a slight gap up. This week my outlook has been neutral based on the index trading in a narrow range for the past week. This morning I was edging into bearish territory given yesterday’s weak close. Doesn’t matter what I think, though—only what the price action says.
My strategy for the past few weeks has been to take advantage of the narrow ranges and low volatility, trading Iron Condors, betting that price will stay in a range, with backup Broken-Wing Butterflies to hedge in case of runaway prices.
By 8am I’d been stopped out of the Iron Condor I had opened to a downrange.
With a nice price spike upward between 7 and 7:30, I switched over to the Futures screen to see what I could work up with S&P.
Setup
I’ve grown tired of getting whipsawed out of trades on the 5-minute and larger timeframe charts, so today I thought I would try trading on the 1-minute chart. This let me trade with tiny risk while learning from the quicker pace.
This is a trend-trading setup. The trick with this and so many other setups is to cut losers and add to winners while using protective stops, and letting the winners run. This setup does not use a profit target, but it religiously uses stops. So, if the 1-minute bar closes below the stop, I’m out. But if the stop reaches breakeven, I’ll add to the position and keep doing so at each breakeven level until I am stopped out.
Setting Risk Size
Since this was the first time I’d traded on a 1-minute chart, I wanted to keep the risk well under $100. With the spacing of the ATR trailing stop indicator, this was resulting in risk of $20 and under for a single S&P Micro E-mini futures contract.
I also have a futures trading calculator that will spit out max number of contracts given a risk size, but I didn’t need to use that here.
When to Enter
Once the S&P traced an uptrend on the 5-minute chart, I looked for an entry to take advantage of possible conviction in the upward move.
I made one entry and was stopped out on the 1-minute chart. Then I re-entered and botched my stop order entry, so I didn’t get stopped out on my new entry. That was lucky, because the index quickly bounced.
The desired entry is when
- The higher timeframe chart (5-min) forms a close above the high of the low period (HOLP).
- 5-minute chart is forming higher highs and higher lows (uptrend)
- Bonus: A squeeze has formed and looks ready to fire on the 5-minute chart (bonus for squeezes on 10-minute or higher charts)
5-minute chart:
1-minute chart:
In this trade, I waited until an uptrend formed before entering.
Protective Stop
It is insane to trade futures without stop orders in the system. However, it can be tricky to manage in Thinkorswim because I have not figured out how to set a stop so that it executes only after a bar has closed at its full duration. I hate getting stopped out by a momentary spasm, only to see price bounce right back. That is why I wait for the close of the bar (open of next bar) to stop.
This setup uses Thinkorswim’s ATR Trailing Stop indicator.
However, I also do not like a runaway price change to bite me, so I put a hard stop order in several ticks below the ATR Trailing stop indicator. That gives price room to touch the bar for a moment without getting kicked out of the trade if it bounces back.
When to Add (Pyramid)
- Add contract(s) to the trade when the ATR Trailing Stop indicates the stop has reached breakeven for the prior entry.
- Repeat each time the next entry’s breakeven is reached by the ATR Trailing Stop.
- Continue to ratchet the stop for all open contracts at the same stop price. Don’t forget to add to your stop order when you add to the position.
1-minute chart for second entry:
When to Exit
Exit all contracts when price closes below the ATR Trading Stop indicator on the 1-minute chart.
Today’s Trade Performance
Final trade on the 5-minute chart:
Discussion
This is an excellent illustration of how pyramiding positions can be done safely for much higher profit potential.
I got stopped out on an entry earlier, so technically I should subtract $20, making the net earning on /MES $290 today.
On combined risk of $40 for the day, that return is a whopping 7.25 to 1 reward to risk ratio.
This strategy also means that stopped-out losers will be much smaller than the winners you let run. Even if you have more losers than winners, this is the kind of trading deliver strong profits.
Note that it works just as well on the short side.