More on the “5 Minute Rule”

I have posted the “5 minute rule” earlier, showing I do not enter any trades the opening 5 minutes of the stock market.  When a stock hits the engaged price during this time (the open), it changes the engaged price to the highs of that opening 5 minute candle.   This means the stock “triggered” but did not engage.   This is only from 9:30-9:35 Eastern Standard Time Zone.    If the listed engaged price is not triggered on the opening 5 minutes, then the setups from CWUS (and Daily updates) engage immediately at their listed prices.   When these stocks engage, day traders use the lows of the day (opposite for shorts) as their stops.   Swing traders will use the suggested stops from the spreadsheet posted.

Stop orders do not apply to the 5 minute rule.   All your stop orders should execute immediately and not wait for price confirmation.  You can always re-enter a trade, when it setup up again.

Here is one illustration from the FCPS website

Scaling profits

Scaling profits is an important part of risk management.    I am a short term trader and I usually scale half when the options go up +5-7%.  In quick markets (like BIIB and PCLN) I often scale after larger gains.  

A 5-7% move in the options (with a >.70 delta) is usually only a .5% (half of a percent) move in the equity.   Options are highly leveraged and I am able to capitalize on smaller movements in the underlying stock.   Many of the debriefs I provide are meant for short term traders, as swing traders are looking for much more upside potential    When I am able to scale fast +5-7%, I reduce my risk while rewarding my trade. In addition, it is imperative that you hold the balance of your position (your runner) to keep paying you (verse your stop).   This type of trading is not meant for everyone, but is very rewarding for my trading style.  You need to identify what trades meet your risk profile and trading time horizon.  We have had a ton of setups over the last 11 weeks with some huge option winners (+50-165%).  It is important to rider your winners (with runners) to increase your odds of long term trading success.  It is inevitable that you will have some losing trades also and it is critical that you manage these well.

11 thoughts on “More on the 5 minute rule and scaling profits”

  1. You mentioned above: “When these stocks engage, day traders use the lows of the day (opposite for shorts) as their stops. ” So, if the price engages during the 2nd 5-minute candle, you use the LOD (which is based on the opening 10 minutes of trading) as your STOP LOSS (this is Fidelity’s terminology), correct?
    Another question is: how long do you wait for that price to trigger before calling it a day? Some of the stocks you list in the spreadsheet which did not engage go back a week or so; are the set-ups still valid for that long of a time?
    Is there anytime where you raise the STOP LOSS price, presuming the stock rises?

  2. Yes, use LOD as your stop after it engages.
    The price can trigger any time during the day , after the opening 5 minute candle.

    You can raise your stop at any time to meet your risk profile and trading time horizon.

  3. So on Saturday (4-13-13), CWUS gave us SBUX with a 59.71 entry price. That price is good indefinitely? It doesn’t have a shelf-life of, say, a week? Some of the set-ups you gave previously did take a little time to develop, but I would think the set-up would change as a much larger amount of time goes on, since the ROE could change.

  4. Joe,

    It has a shelf life for this week, or until I take it off the spreadsheets. There are some setups I keep on for more than a week.

  5. Hello David
    In your personal trading plan, since you know that you’ll be scaling out 1/2 your position every time you get a 5-7% move in the option, do you set a Sell Limit order price equal to a 5% move or do you watch price until it reaches your 5% target and then scale out? Thanks for your fine work.

  6. I usually scale 1/2 around 7-10% (I will place limits when this occurs)
    My next scale is near 20% (another 1/4, and will place limit orders when this occurs)

  7. Sorry, meant to ask, do you place the sell limit orders ahead of time once engagement occurs? – so you don’t have to be watching your screen every second. Thanks again.

  8. Stops for runners
    Are these raised throughout the move?
    Mental or automatic Market or limit? If market does this leave you open for excessively low prices?

    Thank you
    I was hitting wall nice to have your service available.

  9. Stops are stop(market) orders.

    Swing traders use spreadsheet stops, hybrid traders use previous days lows, and day traders use lows of the day (for longs)

    Once I (hybrid) have scale 3/4, I use my entry as my stop(on runner)

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