How to lower risk by turning to a smaller timeframe.
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Hey everyone, Josh Martinez here with tradersagency.com and welcome to this week’s idea. Behind us is the E-mini Russell 2000 on a daily timeframe. We have a fantastic looking consolidation range. Where consistently, when the market touches the bottom level, it has increased in value towards the top level. What’s great about this is about a thousand plus ticks of opportunity. Now when trading with the E-mini contract every tick is worth about $5. This is a 5,000 US dollar buying opportunity if approached properly and if the research holds true. For those of you that do not trade E-minis, or you would prefer a smaller investment, which is always a good idea, focusing on risk management, you can have the micro E-mini contract, which is one-tenth the average investment. So therefore one-tenth the risk and one-tenth the reward. Still 50 cents a tick for every micro, which still makes us a 500 US dollar buying opportunity.
So let’s go to the drawing board. Let’s talk about the concepts here. So at the end of the day, your core belief of how the markets move and how they trend really dictate the overall approach. And my belief and our core belief here at Traders Agency is that these markets u-turn at, on, and/or around the same price points. So one of the things that we do is we will go ahead, we’ll outline with hand-drawn trend lines or vertical trend lines, et cetera, or horizontal lines. And we will look to identify where the market forms lows and where the market forms highs. And then in these areas, we look to basically trade the pattern until the pattern fails. Buy low, profit high, buy low, profit high, buy low, profit high. We’re at the bottom of the range we look to buy low, and then ideally if the research holds true, we profit high.
So let’s go ahead and break this down and look at the overall market. So we have the mini Russell 2000 at the bottom of the blue level. You can see when it touches the bottom level, it goes to the top level, and is relatively consistent. This happened one, two, three, four, five. This is just number six. So this is our sixth opportunity where the market touched the bottom level. And let’s just go ahead and re-double count that. One, two, three, four, five, six. Yep, six times.
So we can see the market is beginning to push up. This isn’t really going to be a debate or a question regarding probability on direction. Direction is up to the top blue level which is price point 2310.9, Give or take. The question is going to be how much risks do we want? And what we can do is we can go to a one hour timeframe, which is going to monitor smaller candlesticks. So what we were looking at is a daily timeframe where every candlestick represents one day of trading. Now we’re looking at a one hour timeframe where every candlestick represents one hour of trading. And when you look at a smaller candlestick, you’re able to monitor wave movements. These wave movements will open the door to additional opportunities, but we look at it as an opportunity to lower the risk.
You can see when the market touches the bottom level, it begins to create a short term bullish trend to the top level. When the market touches the top level, it creates a short term bearish trend to the bottom level, and this just happens back and forth. So bearish trend hit support, bullish trend hits resistance, bearish trend finds support, bullish trend hits resistance, and so on and so forth. So right now, the market’s at the bottom of the range of that consolidation. And we can begin to see that we broke the down angle where the market was making lower lows, lower highs, lower lows, lower highs. And so now we’re going to expect a bullish trend to present itself.
So currently this markets is in the buy zone. We have formed a high higher than the previous high, which is a great first step indicating the buyers are taking control. But if we were to buy the market now, we would have to place our stops below support, which is a very, very large distance away if you are used to being a shorter-term trader. If you are a position trader or a longer term swing trader, having a stop below support really isn’t that big of a deal because you understand the bigger picture move and you’re used to that. But if you’re more of a short-term trader, intraday trader, scalper, same day trader, that’s just not going to be very realistic. And so the thing is, the question is, do we buy now or do we wait?
Well, for me, if the overall goal is to lower risk, then it will be a smarter idea not to buy right now, but instead just to wait to see the market can give a lower price. If the market can give a lower price then we’ll look to buy a counter trend line break, or a candlestick formation, typically near the backside of the old down angle. So we look at buy low, profit high, buy low, profit high, buy low, profit high. And we’re looking to take advantage of these wave movements. So again, this isn’t really a discussion on overall direction. Again, according to probabilities, we’re heading up. It’s just, if you buy the market now, you’re buying at a very, very high price. You’re buying after the market has already extended. And that just opens the door to drawdown.
Drawdown is when the market goes against you. And so in this scenario, sometimes if you buy too high and it goes against you, it can go against you too much. And then you get a little bit nervous, you close out, or the drawdown is too great, and you close out, realize a loss, but if you just wait for a lower price, normally you would get a lower price entry. You get a smaller risk and you get a larger upside.
All right, everyone, that’s Joshua. This is this week’s idea. My name is Josh Martinez with tradersagency.com. Hope you have a great day.
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