Initial Playbook Entry: OTM Butterfly in Trend Direction
Setup Name: OTM Butterfly in Trend Direction
Objective: To profit from trending markets with minimal risk.
Pre-Market Trend Analysis: Refer to the standardized trend identification method as outlined in the playbook. This method should be used consistently for all trades to maintain a 50% win rate, leveraging the natural daily market returns.
Entry Criteria:
- Market Trend: Use the standardized trend identification method from the playbook.
- Time: Target the morning session for entries.
- Volume Profile Analysis: Wait for a pullback to a market structural level.
- Market Structure: Enter at the intersection of a market structure and morning session.
- Entry Debit: Ensure the entry debit is less than 10% of the butterfly width.
Profit Management:
Tracking Unrealized Gains:
- Track the session’s high unrealized gain.
- Apply a trailing stop or tolerance zone based on the time of the session, gamma risk, structural analysis, and price action patterns.
Trailing Stop/Tolerance Zone:
- Morning Session: Larger tolerance zone.
- Afternoon Session: Moderate tolerance zone.
- Closing Session: Smaller tolerance zone.
- Flexibility: Adjust the tolerance zone based on market structures and high-probability price action across those structures.
Capturing Gains:
- Capture gains before reaching the profit tent, which comprises 75% of winning trades.
- These gains are typically between 25% and 200% of the risk taken.
Maximizing Profit:
- For trades that make it into the profit tent (12.5% of trades), manage for 200% to 400% returns.
- Occasionally achieve near-pin trades with 400% to 1000% returns.
Risk Management:
Defined Risk:
- Accept fully defined risk for each trade due to its asymmetric nature.
- Allow losing trades to go to a full loss, except in rare significant reversals.
Market Reactions:
- Adjust or close if a significant market reversal occurs.
Risk/Reward Analysis:
- Expected risk-to-reward ratio of 1:5 or better.
Market Conditions:
- Optimal in low/moderate volatility with sustained trends.
Example Trades:
- Historical examples with outcomes to illustrate the setup.
Notes:
- Monitor key support/resistance levels using Volume Profile.
Template for Variations Based on Market Conditions and Opening Price Action Variations
Setup Name: Descriptive Name of the Variation
Objective: Clearly defined goal for the trade (e.g., profit from volatile markets with large moves).
Pre-Market Trend Analysis: Refer to the standardized trend identification method as outlined in the playbook.
Entry Criteria:
- Market Trend: Use the standardized trend identification method from the playbook.
- Time: Specify the timing for entries.
- Volume Profile Analysis: Detail the volume profile analysis required.
- Market Structure: Indicate the market structure levels to watch.
- Entry Debit: State the acceptable entry debit range.
Price Action Variations:
Gap Up/Gap Down:
- Description: Large move at market open.
- Adjustment: Wait for a pullback and align with the trend.
Opening Range Breakout:
- Description: Price breaks the initial 30-minute range.
- Adjustment: Trade in breakout direction and adjust fly width.
Reversal Patterns:
- Description: Initial move reverses direction.
- Adjustment: Confirm reversal and enter at the structural level.
Consolidation/Range Bound:
- Description: Price moves within a narrow range.
- Adjustment: Wait for a clear breakout or directional move.
Trend Continuation:
- Description: Price continues the pre-market trend.
- Adjustment: Enter after pullback and adjust fly width.
False Breakout:
- Description: Price breaks level but reverses quickly.
- Adjustment: Wait for confirmation before entering.
Pullback to Support/Resistance:
- Description: Price pulls back to a known level.
- Adjustment: Enter with confirmation, and adjust fly width.
Profit Management:
Tracking Unrealized Gains:
- Track the session’s high unrealized gain.
- Apply a trailing stop or tolerance zone based on the time of the session, gamma risk, structural analysis, and price action patterns.
Trailing Stop/Tolerance Zone:
- Morning Session: Larger tolerance zone.
- Afternoon Session: Moderate tolerance zone.
- Closing Session: Smaller tolerance zone.
- Flexibility: Adjust the tolerance zone based on market structures and high-probability price action across those structures.
Capturing Gains:
- Capture gains before reaching the profit tent.
- Expected gains between 25% and 200% of the risk taken.
Maximizing Profit:
- Manage 200% to 400% returns for trades in the profit tent.
- Occasionally achieve near-pin trades with 400% to 1000% returns.
Risk Management:
Defined Risk:
- Accept fully defined risk for each trade due to its asymmetric nature.
- Allow losing trades to go to a full loss, except in rare significant reversals.
Market Reactions:
- Describe adjustments based on significant market reversals.
Risk/Reward Analysis:
- Expected risk-to-reward ratio.
Market Conditions:
- Optimal scenarios for this setup.
Example Trades:
- Historical examples with outcomes to illustrate the setup.
Notes:
- Additional insights and observations relevant to the setup.
Standardized Trend Identification Method
Objective: To consistently identify market trends using a standardized method,
ensuring a near 50% win rate by aligning with the natural daily returns of
the market.
Method:
Moving Averages:
- Use 20 EMA and 50 EMA.
- Bullish Trend: 20 EMA above 50 EMA.
- Bearish Trend: 20 EMA below 50 EMA.
Futures Data:
- Monitor S&P 500, Nasdaq, and Dow Jones futures.
- Compare current prices for futures with the previous day’s close.
RSI:
- Bullish Trend: RSI above 50.
- Bearish Trend: RSI below 50.
Volume Profile: Identify high-volume nodes (HVNs) and low-volume nodes (LVNs).
- Bullish Trend: Price above HVNs.
- Bearish Trend: Price below HVNs.
VWAP:
- Bullish Trend: Price above VWAP.
- Bearish Trend: Price below VWAP.
Implementation:
- Use ONE method CONSISTENTLY for all trades.
- Review and update based on long-term performance data.
This playbook entry and template ensure that traders use a standardized trend identification method for consistency while dynamically managing trades to maximize profit and accept defined risks. The approach to profit management includes flexibility to adjust the tolerance zone based on market structures and high-probability price action, making it easier for traders to follow and implement