Quantifying Your Markets by Thom Hartle
After you've gained some experience with trading, you'll begin to notice that the market you trade has some typical characteristics. Have you ever considered quantifying them? Here are some ideas on the subject.
Buy low. Sell high. Limit your losses. These are all tried-and-true trading axioms, all often stated but rarely quantified. So what does "low" or "high" mean ? What about that old chestnut, "limiting your losses"? Are there really ways to intelligently limit your losses? Think about this: Experts recommend that you place stop-loss orders in the market at price levels that are not obvious, avoiding chart points such as under the previous day's low. So how do you do that, anyway? How can you answer some of these questions?
Let's look at a simple charting example. Consider Figure 1, which shows the Treasury bond market from June 6 to July 27, 1994. This futures contract fell more than five points until July 11 and then rallied more than three points. After peaking on July 20, the price fell back toward 102. If the market continued to slip and fell to 101-29, it reach a 50% retracement of the July 11th to July 20th rally. This may be a buying opportunity. Buying a market after it has retraced 50% of a previous rally is a simple guideline for trading.