Dear Mike

I am an avid follower of your blog and am completely sold on the idea of trading in-play stocks as a result of a greater likelihood of subsequent predictable intraday behaviour.

I have a couple of quite specific questions on the consolidation play that is mentioned in several places on the blog.

Context:
Assume an in-play stock has run up considerably at the open on very high relative interday volume and has got some kind of strong intraday fundamental news fuelling the move. Suppose that the stock has been consolidating at near the highs for an hour or so, with a significant decline in volume, suggesting that the morning buyers are still in their positions.

Stops, targets, and historical win rate
In your Tradersinterview piece, you mentioned that you are a proponent not of earning a mere 2 or 3 times the initial risk, but 5 times the initial risk.

Question 1) In order to earn 5x the risk, I would imagine that you would have to place your stop pretty much at the base of the consolidation. Would this assumption be correct ?

Question 2) Clearly one would not need to be correct many times to still make money, on a trade expectancy basis. I was wondering what a reasonable win rate %, breakeven % (assuming you raise stops to breakeven at some multiple of risk) and loss rate % would be for the consolidation play on in-play stocks. Having looked through quite a few charts, I have come up with 30% (5x) wins, 20% scratches and 50% losses, and a long-term net gain per trade of pretty much exactly the risk taken. How close to the mark do these numbers come to your much greater experiences with the consolidation play.

Thank you for any input that you are able to give.

Bella Responds

Super job attempting to apply statistics to your trading. GMan has been a great influence to me on thinking of my trading more statistically. Very well done here!

You will read that you can profit with a 30 percent win rate. There are some trades I will make with even a lower win rate. I must caution that psychologically it is very difficult for most traders to accept a win rate of 30 percent. And you must consider this for your trading. That is an awful lot of being wrong.

You might start with higher probability consolidation plays and build from them. This will enable you to add other set ups to your playbook that offer this lower win rate. So I might seek confirmation on the tape which increases my win rate with a consolidation play.

One more note, please make sure you understand the big picture with this trade. Where is the next significant resistance level on your long term charts? If this is near we might want to pass on the trade until it clears resistance, even if our intraday indicators scream buy.

Mike Bellafiore
Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading