Capital Ideas & Analysis

Larry Williams talks about how there are three main components to a trade and a trading system.

1) Selection

2) Timing

3) Management of the trade

In keeping with this i am outlining the three main components for the BB/Kelt Trade

1) Selection: Start by scanning a basket of major ETFs (the spiders are a great example). Then look for a sector or industry with a low ADX line, Bollinger Bands have contracted within the Keltner Channel, BB width has been cut in half from its previous peak. Then go about looking with these sectors for stocks that show the same characteristics

2) Timing: In oder to time this there should be a price formation (i.e. rectangle, triangle etc.). in addition, there should be a price channel that has held up within the formation. when price breaks the formations trendline and the price channel, that is the entry into the trade.

3) Management:

• Initial protective stop. When you enter on a wide range  up day, you take the 10 min bollinger bands, and use the bottom bands lowest point as your inital protective stop. However, if you get a pullback, make sure it doesnt have a 3 min bar close below the 38.2% retracement. this is cause for an early exit and signs of a potential reversal.
• Taking 1/4 of the position off and rolling the 3/4ths stop up to break even after a 2x ATR profit. This doesnt always keep you in the move, but it can often lock in gains and protect you from failed breakouts.
• once the trend has extended, and 10 day %R has pulled back to -80, then risen back to -50, place your stop under that low.
• Channel stop. take the channel that held the original consolidation, say 30 days, and divide it by 3. thus we would–in this instance–use a 10 day price channel as our stop.
• Finally, on large range breakouts that do not retrace 38.2% of the intraday move, sell options at the price formations target. this not only minimizes the risk of a failed breakout, it also helps you take advantage of the explosive move which should cause the options in that direction to become overpriced, and well worth selling as insurance.