If you only have an hour to trade…

A reality of part-time trading is that you may not always have time to trade every day. Full-time traders will have a daily schedule and routine tasks will be a part of their day. This is a definite advantage for traders who make a living from the markets, and ultimately you need to find time to become a successful trader. While part-time traders are at a disadvantage, that doesn’t mean they can’t make money when they do have time to dedicate to the markets.

Ideally, the small part-time trader will be trading based on system strategies that take only a small time commitment and develop a routine that can be fit into their schedule. Discipline is an important part of trading success, and following rules-based systems offers the greatest chance to generate enough profits to trade for a living. Systems generally take a short amount of time to trade. In some cases, all required actions can be fit into less than 15 minutes a day. Most aspiring traders can be sure to find that much time every night, and over time they should be able to generate significant profits.

While discipline is important, the reality is that new traders must learn how to be disciplined. This is not a skill that comes naturally. Most people will take up trading because they believe in their ability to beat the markets. This confidence makes it hard to be completely disciplined and trust only the signals generated by a dispassionate series of rules programmed into a spreadsheet or software program.

There will always be a great temptation to place a trade based on what a trader sees in a chart or thinks will happen based on the economic news or a gut feeling. Many new traders will want to follow the markets on a short-term basis and trade in real-time. This could actually be a useful learning experience, especially if the trades are placed based on discipline and follow a set of rules.

To develop a system, we will need to think about how markets behave and find a way to combine that with the desire to trade. We also want to find a set of rules that can be applied on an inconsistent basis and still have a high probability of success.

Part-time traders will most likely be trading in the evening, when they have time. They will need to find a liquid market which allows them to open and close positions without excessive slippage. Foreign exchange markets are open in the evenings and are generally fairly liquid with small spreads that help keep trading costs manageable. They are definitely tradable in the short-term.

Another market to consider is the e-mini S&P 500 futures contract. The required margin is relatively low which makes them suitable for small traders. This is also a market that is open in the evenings and is very liquid under normal market conditions. Small orders are generally filled with little slippage and commissions are very low.

In the short-term, stocks generally show a mean reversion pattern after extreme moves. That means an overbought/oversold indicator should work well. RSI is a popular indicator but the calculation introduces a series of lags and that makes this indicator more suitable for long-term trading. RSI actually delivers impressive results in many long-term strategies. Another popular indicator is stochastics, which also has some lag built into the calculations. Of the two, stochastics will generally offer more timely signals with short-term trading strategies.

Another overbought/oversold trading tool is PercentR, a useful indicator developed by Larry Williams, the creator of a wide variety of very useful trading rules. This indicator is similar to the stochastic. It will always have a value between 0 and 100, but it is calculated as a single line rather than the two required in stochastics. It delivers timely signals, with minimal lag when compared to the price action.

We are looking for an idea to trade occasionally, so we want a high probability trade but fairly frequent buy and sell signals. A short-term PercentR, using 4 periods to calculate the indicator, will be used to identify short-term extreme conditions. Other periods can also be used, but we are trying to develop a short-term strategy so the timeframe for all indicators should be kept short.

To capture mean reversion which should see markets deliver profits from short-term reversals, long entries will be made in deeply oversold markets, where the PercentR is less than 3. The buy will take place when the indicator rises back above 3. Short entries will be signaled when PercentR falls back below 97. These values will be found in markets that have moved very quickly, often being driven by a news event. They also occur fairly frequently, on average about three times a week in the e-mini S&P 500 contract. There is no guarantee a signal will occur when the trader is watching the market, but there is at least a high probability that they will find this signal once in a while and be able to trade during the short time they have to follow market activity.

Since this system will not be traded consistently, the exit strategy can be a decisive part of determining whether or not any single trade will be successful To put the odds strongly in our favor, exits will be based on another tool developed by Larry Williams, what he calls the Bailout Exit. Trades are held until they show a profit on the bar chart. We are entering with a signal based on 15-minute bars. The trade will be held until at least the next 15 minute bar forms. If the position is profitable at that time, it will be closed. If it shows a loss, it is held until the next 15 minute bar is drawn, and is only closed when it shows a profit on the chart. The exit is based on the first profitable open after a position is initiated.

This is a very interesting exit strategy. You will be right on 100 percent of your closed trades. But you need a highly reliable entry signal or the draw down in an open position will destroy the account equity. Extremely overbought or oversold markets are very likely to reverse in the short-term, which makes this a signal that should be very reliable. The logic is sound and the trader should expect to see a quick profit from the entry.

It needs to be emphasized that this exit is only suitable for high probability trades. It can also be effectively combined with other exits, including very wide stop losses or time exits. The stop loss should be set to at least 10 points in a market like the S&P 500, which is only $500 per e-mini contract. It should serve only to avoid catastrophic trading losses.

With the PercentR strategy, testing since the beginning of 2011 through mid-October, the win rate on this strategy would be 100% with average profits of more than $1,000 a month, after deducting $5 per trade for trading costs. The e-mini is a highly efficient and low cost market which could actually be traded with very low slippage. Both long and short trades are profitable. The largest drawdown is about one-third of the system gains, at about $3,500. This particular strategy could be used with an account size of about $10,000.

This strategy could be refined with a moving average filter to only trade with the longer-term trend. On a 15-minute chart, that could be 8 bars, or even just a little longer. On short-term charts, using a moving average that is too long captures too much of the old price action. Short-term charts are for short-term trades and including price action from more than a couple days ago will lead to less useful signals.

You could also use this strategy with other markets. It is best to use news driven markets where big jumps are most commonly seen. The euro has reacted sharply to news, and crude oil also reacts quickly to world events at times. Emotion-driven markets, like gold and silver, also offer a number of trading signals.

Foreign exchange and commodities are less mean reverting than the stock market. That means this strategy would work best by expecting to see price action follow through from an extreme – going long when PercentR crosses above 95 and shorting breaks below 5, for example.

As a supplement to a systems strategy, short-term trading can be useful. It allows for trades while limiting risks. For most traders, the bulk of profits will come from systems but an approach such as this will allow traders to determine if they have the skills for a more discretionary approach.

Michael J. Carr, CMT