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Hedge Strategy Overlay Example

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JSServices Playbook Analytics identify the inherent strategy themes and specific trade opportunities within the dynamics of the current condition as expressed by the state and structure dynamics. This context provides guidance of “what” to do and “where” to do it by highlighting the Hedge Strategy themes that are anticipated to dominate price action if a market breaks structure and transitions into a new risk state. The PlayBook analytics identify specific PriceMap action qualifiers, specifically the R LEVEL and CriticalRange boundaries (UP “Upside Pivot” and DP “Downside Pivot”) that should be used to standardized trade entry techniques to form the basis of an actionable trade strategy.

HEDGE STRATEGY

SELL UP REVERSAL |  SELL R BREAKOUT

The example above highlights 2 entry tactics for this structure bias, a SELL UP REVERSAL, which can be used to reduce profit-giveback and a SELL R BREAKOUT to mitigate downside risk from a shift in sentiment.

Risk Parameters

The PlayBook Tactics suggest the specific trading techniques that should be used to capture the most favorable risk/reward opportunities within each Strategy Theme. Each Tactic provides the best entry and exit technique and its optimal price level. The very specific nature of the PlayBook Tactics makes them ideal as the basis for a systematic approach to trading or an automated trading system.

The Risk Parameter Market Metrics are used to identify the optimal entry level and the surrounding acceptance zone in which an opportunity remains valid when executing a specific trade tactic. The Market Metric boundaries offer a unified approach to optimized entry and exit tactics across all markets and asset classes.

RISK PARAMETERS

R-LEVEL Market Metrics VAR, AD, MSD

Hedge Strategy Overlay Example

A net long stock position that has a high correlation to the SP500 has 2 basic risks associated with it. Downside Failure Risk and Profit Give-back Risk. The diagram below provides a real-world example of how the trade entry techniques and risk parameters are used to protect downside failure and profit give-back risk.

HEDGE STRATEGY

PlayBook Entry Tactics                                                            SP500 E-Mini with Market Metrics

PROFIT GIVEBACK RISK

TACTIC – SELL UP REVERSAL –The SELL UP REVERSAL is designed to reduce profit-giveback by selling the market after an “exhaustive” reversal signal. In the example, conditional A1 (Alert 1) has been met but not A2 (Alert 2) or A3. For the REVERSAL to be “true” each condition must be met 1st to then trigger the SELL UP REVERSAL at which time SELL orders can be placed in the acceptance zone.

DOWNSIDE FAILURE RISK

TACTIC – SELL R BREAKOUT – TACTIC – The SELL R BREAKOUT is used to reduce downside risk by selling the market after negative shift in sentiment. In this example it would be anticipating a broader “corrective” expectation following a Daily sentiment shift targeting the Weekly R LEVEL. In the example, conditional A1 (Alert 1) has been met but not A2 (Alert 2). For the BREAKOUT to be “true” each condition must be met 1st to then trigger the SELL R BREAKOUT at which time SELL orders can be placed in the acceptance zone.

Summary

JSAnalytics provide a systematic approach to create risk defined trades as the basis for a Hedge Strategy Overlay which can reduce risk and profit give-back with defined tactics.

Click here to request a consultation on how JSServices can provide your trading program with a new edge.

 

Optimizing TradeTactics

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TradeTactics can be optimized when executed within market metric thresholds and their effectiveness improved by using real time order book events that identifying areas of intensity of trade, resting paper and liquidity shifts.

Overview

  • Market Metrics are the price thresholds for signal acceptance around a PriceMap level.
  • Intensity of trade is defined as an increased flurry of activity that is supported with good volume. This is displayed as a volume dot or circle on our integration partner platforms.
  • Resting Paper identifies price levels that have a significant amount of volume that has been “resting” for some time that identifies potential support or resistance.
  • Liquidity Shifts identify significant increase or decrease in volume at a specific price point which signal an increase or decrease to interest that that level.

Practical Application

Order book events provide insight for two types of events:

  1. Momentum REVERSAL
  2. Momentum BREAKOUT

When order book events occur within market metrics thresholds they provide additional clarity for TradeStrategies that have been normalized to specific PlayBook Themes. Performance is enhanced and the effectiveness of TradeTactics is optimized by incorporating order book events within market metric thresholds.

The following is a practical application of combining order book dynamics and market metrics to optimize execution tactics of a PlayBook strategy theme.

PlayBook Example:  ES PlayBook Oct 14 2016

es-full-pb-oct-14-2016

R=CRX+

In the PlayBook example above the ES is in a BEAR TREND with the R LEVEL above the market at the CRX+. In this market structure bias (MSB) the negative sentiment of the BEAR TREND will remain intact below the CRX+ R LEVEL. The CRX+ is a validation level that will confirm or deny an upside CriticalRange BREAKOUT.

10-18-2016-2-51-10-pm

The FACT that the R LEVEL is equal to the CRX+ and is in the context of a BEAR TREND market state, makes it more likely that the CRX+ will contain an UP BREAKOUT. The R LEVEL in this position creates a “resistance band” to FADE momentum and accept exhaustive signals within the CRX+ – UP price band, anticipating a resumption of the BEAR TREND condition.

Optimal Strategy Theme

The OPTIMAL PlayBook Strategy Theme for the market structure bias is a SELL R FADE and a SELL UP REVERSAL. These strategies are in alignment with the general underlying BEAR TREND outlook that looks for sell signals below the R LEVEL.

The image below shows a successful performance for the Optimal Strategy theme for the ES on OCT 14 2016.

orderbook-int-trade-post-1

Market Metrics

By incorporating market metrics and the dynamics of the order book TradingTactics are optimized and performance enhanced. The image below shows the PriceMap overlay with market metric identifying the area of signal acceptance for the SELL R FADE and SELL UP REVERSAL.

orderbook-int-trade-post-2

Using the above image:

  • SELL R FADE – The market metric AD (Alert Distance) should be use as the initial entry for any FADE STRATEGY (R-AD in this example). By definition a FADE anticipates momentum to turn “in front” of the figure. Entry TradingTactics are enhanced by aligning them with the metrics that define the optimal threshold for signal acceptance. Without this intelligence good trades are missed which did not “make it” to the figure. By definition the “best” FADE is one that “exhausts” in front of the figure within the Alert Distance and Variance (VAR) Market Metrics.
  • SELL UP REVERSAL – A REVERSAL by definition is a “false breakout” that 1st violates a PricMap level and then trades back through it. The market metrics can be used to confirm a REVERSAL using the AD (Alert Distance) on both sides of the figure. First to signal a breakout by having price action exceed the UP+AD and next to confirm the exhaustive failure or REVERSAL by trading back through the UP-AD.
Order Book Dynamics

Order book dynamics optimize TradeTactics by providing key intelligence to the facts of the moment. The PlayBook identifies specific macro themes that TradeStrategies can be aligned to and normalized at specific PriceMap action levels. Market metrics define “where” a potential shift in momentum or state will occur by outlining the threshold of signal acceptance. Order book dynamics complete the optimization process by improving timing and identifying “when” an opportunity will occur and if it is valid. The image below shows how incorporating the micro structure of the order book enhanced the effectiveness of the execution of the SELL R FADE and SELL UP REVERSAL PlayBook Strategy Themes.

orderbook-int-trade-post-3-bm-2

Using the above image:

  • SELL R FADE – The context of the PlayBook Strategy Theme “FADE” and normalized PriceMap entry level “R” provide an expectation to anticipate a rejection from the R LEVEL which is the price point that represents the peak for any corrective action of the BEAR TREND state. The market metrics further improve vision by identifying the threshold area surrounding the R FADE to anticipate a rejection. Using this intelligence as the macro context of the SELL R FADE opportunity the order book dynamics provide the micro confirmation.
    • Order Book Events
      • Intensity of Trade – As price action breaks out above the UP there is a flurry of buying in-front of the R-AD metric. As the MKT trades into the signal acceptance area (R-AD) there is less intensity identifying a divergence of interest.
      • Resting Paper – A “wall” of resting paper builds up within the R-AD metric confirming an area of “resistance” which confirms the validity of the R LEVEL itself.  A re-test of the high area does not generate any intensity signaling a divergence in interest and confirming the SELL R FADE.
  • SELL UP REVERSAL – The “wall” of resting paper above the MKT gives a “more likely to occur” expectation to a negative turn and a resumption of the BEAR TREND. The macro context of the market state and structure provides trade vision that a REVERSAL from the UP would not only confirm the SELL R FADE strategy but would also generate a new sell opportunity with the potential to be the start of the next extension lower.
    • Order Book Events
      • Liquidity Shift – This event provides a “tell” that a new trend is developing by shifting liquidity down. In a prelude to a REVERSAL opportunity after a rejection from the R LEVEL a negative liquidity shift offers a chance to anticipate a failure from the UP-AD and get into a trade early with the order book shift.
      • Intensity of Trade – A failure from the UP-AD metric signals a SELL UP REVERSAL strategy which when supported by intensity of trade confirms the event and is similar to validating a BREAKOUT.
      • Resting Paper – It is interesting to note that prior to the UP-AD failure, resting paper below the market began to “move out of the way”, which was another “tell” confirming the negative sentiment shift and underlying dominance of the BEAR TREND condition.
Summary

Observing price action within market structure in the context of the market state and underlying PlayBook strategy themes provides a macro foundation for TradeTactics which can be optimized by incorporating market metric thresholds and order book events. This combination of macro structure and micro structure offers the best results in creating more effective execution of TradeTactics.