How to Define Risk Using Time

To define risk immediately after a position has been taken, I first need to define the fair value area using intraday charts. An average trading session for stocks and ETFs lasts 6.5 hours, or 13 30-minute periods. Seventy percent of that is 9, and 9 divided by 2 is 4.5. A value area covers roughly 70% of trade during the day. A value area has a top and bottom and illustrates the highest concentration of volume. In other words, it is the area that buyers and sellers transact most often.

To construct a value area, I search for a price near the top of the range that has traded in 4 or 5 30-minute periods. The bottom of fair value is near the lower end of the range and has also traded in 4 or 5 30-minute periods. The graph below illustrates recent daily value areas for IWM.

In the MTM Daily Edge coaching session, we got a buy signal last Friday (Oct. 2, 2020). After the position was taken at 152.0, a stop loss was entered. When taking a long position, I use the bottom of value from the previous day to define risk, or in this case 150.2. As the market moved higher in the ensuing days, I trail a stop using the bottom of value to lock in profits as time passes. Over the next 4 days a profit of $7 was locked in using this method. Conversely, if a short position is realized I use the top of the previous value area to define risk and trail stops. This approach of trailing stops is more effective after a consolidation phase of 3 to 5 days.

John Seguin, Market Taker Mentoring

Trader Education