Morning Market Analysis

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S&P 500 Futures (/ESZ0) Market Profile for Wednesday, 09/30/2020.

  • Value Area High – 3337.00
  • Point of Control – 3327.50
  • Value Area Low – 3320.75
  • Pivot Point – 3333.00

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Good Morning, the E-Mini S&P 500 as of this writing at around 7:45 am EST, would be opening Outside of Balance/Value & around Yesterday’s Low of 3316.50. Overnight inventory in my eyes is pretty much 76% net to the short side with futures currently down -19.00 points as of this writing in the now.

Things to note this morning, the E-Mini S&P 500 Futures (/ESZ0) from yesterday was Bearish, but we are trading just below the weekly range, which isn’t a great place to get short; my plan is to wait for a pop above the range so I can sell into stops of the breakout buyers. The important clue will be where price is at the open, In Value or Outside of Value? I will be using Day Trade Setup Types 3 thru 6 as my guide at the open.

Going into today (after looking at price action from Micro Composite Volume Profile Chartbook), I believe levels that need to hold today for Buyer’s to stay in control are an Initial Support Level of 3300.25 ish & needing to hold/stay above 3270.50 ish level. For the Seller’s, I think if price is above 3270.50 ish going into today, not much chance for the Seller’s. “If Aggressive”, you’re looking for Buyer Failure (IF NOTICEABLE) at today’s Key Resistance Levels above on Team Day Trader’s “Trader Worksheet” to sell high. Otherwise, I would look for price to break below 3270.50 ish & hold a pullback before selling this market short. So, let’s recap, dips should be buy-able till price is below 3270.50 ish, below gets vulnerable & a chance for Seller’s to take back control.

Your focus should be on levels & where value develops. Levels to watch price action today are going to be the reaction around 3327.50 ish, & if price closes above 3337.00 or below 3300.25.

Don’t forget, **Sequence = Failure, into Strength, into Pullbacks, and back to retest the Highs or Lows. CONTEXT is extremely important. Do not trade any setup mechanically and expect to have good results. Always judge the strength of any directional move in terms of market internals, overall pattern, tempo, & where the current range sits in relation to prior areas of balance.

Real Time Economic Calendar provided by


Embrace your subscription here with Pries Capital. As you work your way through your subscription, remember that this is not all-encompassing. It is a 40,000-foot view of how day trading/investing works & is designed to give you the basic information to get past the all-important question of how to get started. As time goes along, make note of any questions or highlights, & then come back to Jason, whether email or by phone, & ask questions to learn more about anything on your mind. Team Day Trader, a division of Pries Capital, is a community of all diverse types of day traders, so begin participating, learning, & growing.

With that said, “We have great challenges & great opportunities, and with our help we’ll meet them together!” – Jason Pries

Market Trading Report

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Federal Reserve Chair Jay Powell says he is keeping rates at zero for a while. It was no surprise, but it confirms that we will continue to ignore US Treasury bonds. They might not pay enough in our lifetimes to warrant our attention ever again!

Instead, we will turn our focus to higher paying fixed income vehicles. I am talking about corporate bonds, convertible bonds, and “preferred” stock. They all dish more dividend per dollar than lame T-Bills. But is this the best time to buy them, with an election just around the corner? It is a common question, as I am seeing many subscribers writing in to ask:


It was the 4th straight down
week for the market, w/ only
the NASDAQ making a gain.
Small caps took it on the chin,
falling -4.49%, and continues
to trail the other 3 indexes by
a wide margin so far in 2020.

The VIX, a measure of
investor anxiety, shot up to
its highest level in nearly two

First, let us use the most accurate tool out there, the prediction market.

You can ignore the “gurus” who have developed models to predict the election. First, they were all wrong in 2016. Second, it is not necessary to listen to them because we can tap the “wisdom of crowds” (really, the wisdom of gamblers!) by looking at a site like PredictIt. We should not use a random poll to base our investment decisions on. We should follow the money that is flowing through a site like PredictIt to make actual wagers on real outcomes.

When making our dividend decisions, we do need to plan for any version of 2021-22 politics. As I write, the presidential election is being bet 56/44 in favor of the Democrats. It is basically a toss-up. The Senate is being priced close too with a 60/40 betting lean in favor of the Democrats. Only the House (83% chance of continued Democrat control) can be assumed to be a done deal.

Now what do the incumbents and challengers all have in common? What is the one area where they almost certainly agree? They are likely to let Fed head Jay Powell do whatever he needs to do to support the stock market economy. That will probably involve Powell’s sleek office printer:

The “economy” is a convenient excuse to ramp up greenback printing. However, we contrarians know that stock prices and the actual economy are two different things. Wall Street (sadly) does not care that our favorite restaurant is shutting its doors on Main Street. The stock market indices trade off the profits of big businesses. And big firms are still making lots of money. Plus, there is still a ton of “new cash” out there. Powell cranked up his money printer and flooded the world with liquidity starting in March. Other central banks around the world were generous as well. Here in the US, our M2 money supply is up an astounding 23% year-over-year.

Let us not let the current pullback distract us from this “big picture” view. We were due for a breather, as stocks do not always go up. We have got the pullback, it has taken down most stocks and some fixed income, too, and now it is time to go shopping.

That said, what are the best bonds to buy before, during or after the November election? We income seekers should consider:

  • Preferred shares, which pay 7% or more today,
  • Convertible stocks, which benefit from a rising stock market because they “convert” from bond to stock as their underlying equity price rises (the fund I like pays 4.4%), and
  • Overseas bond funds, which pay up to 11% today thanks to the big yields offered by emerging market governments.

Another benefit of these funds, beyond their big dividends, is their downside protection. For example, the S&P 500 topped on September 2 and is down 9.3% (as I write). Meanwhile, my favorite preferred stock fund, the Flaherty and Crumrine Dynamic Preferred and Income Closed Fund (DFP), is up by 0.6%. (Its positive total return is represented by the monthly dividend the fund just confirmed yesterday!)

If you’re wondering where I’m finding these pullback-proof monthly dividends… and perhaps the type of glue I’m sniffing to see these 4%, 7% and even 11% yearly yields in Bond-land, I’ve got three letters for you: CEF

There are some great closed-end funds (CEFs) that dish income investors these generous dividends. The great thing about CEFs is that they trade like stocks because they have fixed pools of shares. Which means that when the market slides, they can often trade at discounts to their NAVs (net asset values).

A 12.5% discount is unheard of for a bond ETF. However, there are many bond CEFs that are currently trading at discounts this generous. In fact, we can buy some secure foreign bonds for as little as 86 cents on the dollar (a 14% discount to NAV), thanks to this recent pullback and general ignorance about CEFs.

Economic News of Interest:

The number of Americans filing new claims for unemployment benefits unexpectedly increased last week, supporting views the economic recovery from the COVID-19 pandemic was running out of steam amid diminishing government funding. Initial claims for state unemployment benefits rose 4,000 to a seasonally adjusted 870,000 for the week ended Sept. 19. Data for the prior week was revised to show 6,000 more applications received than previously reported. Six months after the pandemic started in the United States, jobless claims remain above their 665,000 peaks during the 2007-09 Great Recession.

U.S. federal debt held by the public will balloon to about 195% of the country’s economic output in 2050, from about 98% at the end of 2020 and 79% in 2019, the Congressional Budget Office projected on Monday. The CBO, in its annual Long-Term Budget Outlook, said that increased federal government spending associated with the coronavirus pandemic has accelerated the growth of U.S. budget deficits and debt. The nonpartisan budget referee agency said that the 2020 deficit is projected at 16% of U.S. GDP, and the share will fall for several years, but will begin rising sharply again by 2028.

Failure to deliver more government aid to households could precipitate a wave of mortgage defaults and evictions, Federal Reserve Chair Jerome Powell said on Thursday in a fresh warning amid a continued deadlock in Congress over another coronavirus relief package. While households are spending now, perhaps using what’s left of money from the $2.3 trillion package passed by Congress in March, “the risk is they will go through that money, ultimately, and have to cut back on spending and maybe lose their home or their lease,” Powell said in testimony before the Senate Banking Committee.

U.S. orders for durable goods increased in August at a slower pace than expected, restrained by declines in bookings for motor vehicles and military equipment, though a gauge of business investment rose more than forecast. Bookings for durable goods — or items meant to last at least three years — increased 0.4% from the prior month after an upwardly revised 11.7% jump in July, Commerce Department data showed Friday.

Now, The Week Ahead…

While it may no longer be the top news story in the financial press, the coronavirus pandemic is still with us. On Wednesday, Johnson & Johnson (JNJ) said that its vaccine candidate is progressing to Phase 3 trials. In the meantime, several countries in Europe are considering reinstating business and travel restrictions, as the number of new cases has re-accelerated. If the pandemic continues to spread, it could hamper the positive trajectory of economic recovery reported in recent months.

The first U.S. Presidential debates will occur on Tuesday evening. President Trump announced the nomination of Amy Coney Barrett to the Supreme Court on Saturday. This adds another layer of conflict to an already contentious election.

We will get the final reading for second-quarter GDP on Wednesday. This is followed by the closely watched monthly Payrolls Report (September) which is due out on Friday. This should be the last payrolls report before the US election. Estimates call for the addition of 800,000 non-farm payrolls in the month, and for the headline unemployment rate to tick down to 8.2%. Following the snap-back recovery in stocks from March lows, we believe that investment gains will be harder to come by in the second half of the year. As a result, deciding what and when to buy can be challenging for any investor. However, the fact remains that attractive investments are out there if you are willing to dig a little deeper.

Index Charts:

With the weekend ending, it remains to be seen whether the sellers will exert further pressure next week or will we see a turnaround, with major indices reaching key levels within a mixed macro backdrop.

Shares have fallen for four weeks, with the S&P pulling back around 10% from its record high. Sentiment has been downbeat so far in September. As well as profit-taking from record highs, there has been growing concerns about the disconnect between the economy and the markets.

Besides valuation concerns, the alarming rise in coronavirus cases across Europe and other parts of the world has revived growth concerns, just as the global economy was beginning to recover from the pandemic.

Recent macro data suggests the stimulus-driven US economic recovery may also be stalling, and there is growing uncertainty over whether there will be more fiscal stimulus with the presidential election looming. Yet, the selling has not been anything like back in March. And let us not forget the big elephant in the room. Officials from the Fed and other major central banks have been reminding investors that more stimulus may be provided if the economy warranted it. Also, several European countries have already extended their fiscal stimulus support and there is a good chance the US government will follow suit.

With various stimulus measures still ongoing, and more fiscal and monetary stimulus potentially on the way, we continue to do what we have done so over the past decade: buy the dip again. It is worth noting that some investors who were presumably hoping for a pullback have now got a 10% correction from the record high, which makes it more probable than not that we see a rebound soon.

With that said, from a technical point of view, the S&P has now reached a critical juncture after its recent falls:

S&P 500 Short-term (SPX)… As the daily chart shows, the index has been very sensitive around the ~$3215.00 area in the past, where we have seen good bounces and rejections from. And it was precisely here where the index once again reacted from on Friday, as it started to turn higher after being in the red in the overnight session.

But was this bounce an oversold reaction, or a sign of things to come in the next few sessions?

Well, some would argue that the RSI (banded oscillator) was at bear oversold levels and after a 10% correction you are bound to see some dip-buying at or near support.

For confirmation, I would now like to see the S&P stage a breakout point from this correction. The Day Trade Setup Type 15 is one of my reliable reversal patterns. So, a decisive break above would be deemed a bullish development.

To wrap-up this Market Trading Report, Friday’s reaction was nice, but it now needs to break out—and soon. Otherwise, there is a risk we could see further falls in the near-term. Indeed, a daily close below ~$3215.00 could see the index drop towards its 200-day average at ~$3107.00, or even lower. But even if that bearish setup plays out, it is worth remembering that in the grand scheme of things, the correction from the record highs has been relatively shallow thus far. The index has not even retraced to its 38.2% Fibonacci level (~$3054.00) yet. This means that objectively, the long-term bullish trend remains intact and traders should be prepared for a sudden short-squeeze rally to potentially emerge, even if the macro backdrop may suggest otherwise.

Charts of Interest:

Cirrus Logic (CRUS) is my “Chart of Interest” this week. The company makes integrated circuits for consumer electronics and other various industries. The stock gained more than 5% this week. We believe this positive momentum can continue throughout the remainder of 2020. Here is why:

What makes Cirrus Logic stand out is that the company derives nearly 80% of its sales from Apple (AAPL). This type of revenue concentration can often raise a red flag. It is less of a concern when you are talking about one of the biggest and best-run businesses on the planet. That leverage to the Apple juggernaut was on display last month when management posted quarterly results that exceeded expectations.

The company earned $0.53 a share in the June quarter, as revenue increased fractionally from a year ago, to $242.6 million. Looking ahead to the September quarter, management sees sequential sales improvement, to $290 to $330 million. Cirrus Logic has $606 million (over $10 a share) of cash and investments on its debt-free balance sheet. Backing this out, the company is currently valued at just 16.7x expected full-year earnings of $3.15.

The stock has received upgrades from two analysts this past month. The average price target of six active brokerage firms is $76.50, which represents 21.4% upside potential.

On top of the positive aspects mentioned already, the company has seen insider buying, as well as improving sentiment from investors (both professional and individual).


Embrace your subscription here with Pries Capital. As you work your way through your subscription, remember that this is not all-encompassing. It is a 40,000-foot view of how day trading/investing works & is designed to give you the basic information to get past the all-important question of how to get started. As time goes along, make note of any questions or highlights, & then come back to Jason, whether email or by phone, & ask questions to learn more about anything on your mind. Pries Capital is a community of all diverse types of day traders and investors, so begin participating, learning, & growing.

With that said, “We have great challenges & great opportunities, and with our help we’ll meet them together!” – Jason Pries

Market Trading Report

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BONUS >>> I’m going to try doing these at the end of every month… August 2020 Monthly Market Review

Also, here is September’s Trading Day Expectancy for anyone interested.

In August I was thinking about 3 major market themes that I expected would continue to emerge or completely reverse.


It was a down week for
the market, with the major
indexes pulling back on
Thursday and Friday.

Main indexes tumbled on
Thursday, heading for
their worst day since June
as technology dumped,
while economic data
highlighted concerns
about a long and difficult

  1. The focus on the junk bonds (JNK) and investment grade bonds (LQD). Junk bonds have remained strong indicating the appetite for high risk companies has not waned-good, news for the market. Investment grade bonds sold off into a warning phase. However, on a weekly chart, it held just where it needed to at 134.31-the area of support for now.
  2. The focus on the banking and financial sectors of the market. Although those sectors saw a brief pop, XLF and KRE are pretty much exactly at the prices they were when I left. What does that mean? Most likely, these areas reflect the reality of the economy and how many loan defaults and bankruptcies continue to plague real economic growth.
  3. The dollar, low rates, rising metals, up move in sugar and all the factors that still support a stagflation theory.

Is that still in play?

No doubt the recent rally to new highs in the S&P 500 and Nasdaq is impressive. However, this market remains divided, with stocks skyrocketing or languishing and not much in between. The Economic Modern Family is equally mixed with the Russell 2000 and Russell 3000 trading sideways. Regional Banks (KRE) stuck near the bottom of the range and Semiconductors (SMH) are flying.

Here is where we see the stagnation part of the stagflation theory…

To date, grains (wheat and soybeans), which I have pointed out repeatedly as trading at 100-year lows versus the SPX, have rallied well. Gold has held its gains although has yet to convincingly clear $2000 an ounce. Rates have firmed a bit while the dollar continues to free-fall. Only late this week, the dollar found some footing, which could take it to test overhead resistance. Sugar, my secret sauce for stagflation, edged higher above both the 50 and 200-day SMA’s. Sugar can continue to tell us more about rising food costs amid supply chain disruptions. I am still watching commodities, particularly gold and silver.

And now, with civil unrest a daily headline globally as well in the US, the market, which is very one-sided towards tech, could be close to overdone.

For that, volatility is a key to keep eyes on.

After a reversal bottoming pattern on August 26 (Day Trade Setup Type 15) confirmed, even while NASDAQ runs, the move in VIX (the fear index), over the 50-day SMA (Recuperation Phase) and holding above my 20-Storm Gauge, could mean trouble.

Economic News of Interest:

There are growing signs the labor market recovery from the depths of the pandemic in mid-March through April is faltering, with financial support from the government virtually depleted. Non-farm payrolls increased by 1.371 million jobs last month after advancing 1.734 million in July. Government employment rose 344,000, with 238,000 temporary workers hired for the population count. Job growth peaked at 4.781 million in June. The unemployment rate fell to 8.4% last month from 10.2% in July, even as more people entered the labor force. Economists polled by Reuters had forecast 1.4 million jobs added in August and the unemployment rate sliding to 9.8%.

The number of Americans filing new claims for unemployment benefits fell below 1 million last week for the second time since the COVID-19 pandemic started in the United States, but that does not signal a strong recovery in the labor market.

The drop in initial claims to a five-month low reported by the Labor Department on Thursday largely reflected a change in the methodology it used to address seasonal fluctuations in the data, which economists complained had become less reliable because of the economic shock caused by the coronavirus crisis.

“There are new seasonal adjustment factors this week which brings down the joblessness slightly. The labor market looks just as bad as it was and it will be a miracle if economic growth can continue at such a fast clip during this recovery if it has to drag along millions and millions of workers without paychecks.”

Chris Rupkey, chief economist at MUFG in New York

The number of people receiving unemployment benefits under all programs jumped 2.2 million to 29.2 million in the week ended Aug. 15. A report on Thursday showed growth in the services industry slowed in August. The services sector, which accounts for more than two-thirds of the U.S. economy, has been hardest hit by the pandemic.

Now, The Week Ahead…

China’s August trade data will give insight in to the speed of the recovery from the pandemic in the world’s number-two economy. On Monday, trade figures out of China are expected to show exports rose solidly for a second straight month in August, while imports edged back into growth. Chinese exports have not been as severely affected by the global slowdown as some analysts had feared and are set to be a key driver in the nation’s economic recovery. Already high tensions between Washington and Beijing are expected to escalate ahead of the U.S. presidential election in November. China remains well behind on its pledge to boost purchases of U.S. goods under the Phase 1 trade deal that took effect in February.

On Thursday, the European Central Bank (ECB) will hold a policy meeting against a background of slowing inflation and a strengthening euro. ECB officials will have plenty to discuss after the euro hit $1.20 for the first time since 2018 and euro zone inflation turned negative in August for the first time since 2016. The slide into deflation is a red flag for the central bank, which targets annual inflation of close to, but just below 2%.

The euro has been boosted by a broadly weaker dollar and improved sentiment towards the European Union’s 750 billion-euro pandemic rescue fund. As such, any impact on inflation may be temporary. But in the longer term, the ECB may be forced to reevaluate its monetary policy given the Fed’s shift to tolerate higher inflation, which could weigh on the dollar.

U.S. consumer inflation figures will be closely watched after the Federal Reserve’s recent policy shift to adopt average inflation targeting. U.S. inflation seems to have little chance of hitting 2% anytime soon and Friday’s inflation figures for August are expected to show core CPI rising 0.2% month-on-month and 1.6% on a year-over-year basis. The Fed, which is now aiming for an average has said it will not worry about inflation running above its 2% target, which is seen as giving it room to keep interest rates low for as long as it wants.

That is good news for stock markets, real estate property and other assets that benefit from cheap money.

As always, we’ll be watching Thursday’s report on initial jobless claims for weekly insight into the strength of the recovery in the labor market after the August jobs report showed that hiring slowed again last month as financial aid from the government dried up.

Index Charts:

Before we get to the state of the market, I figure it is probably a good idea to address the current violent selloff that happened in the stock market towards the end of the week.

The fact that the market suddenly fell, without notice, and on no news, should not come as any surprise to our clients. In addition, everywhere you look, media outlets have been sending a “buyer beware” message for some time now. So, the question was not “if” the market would eventually sell off, but rather “when”?

Cutting to the chase, it looks to me that the “unwind” of the speculative behavior (aka aggressive call options trading), which was likely triggered by options expiration, is creating what amounts to a version of “forced liquidations”.

Sure, profit-taking is going on here as there are lots of profits to be had in the mega-cap COVID winners. Heck, even I “right-sized” my position in Apple (AAPL) last week by taking some profits since the percentage holding in the portfolio had gotten out of hand. (And before that, we had used the joyride to the upside to rebalance our aggressive stock portfolio back to the target percentage holdings, thus “right-sizing” the positions into strength.)

When will it end, you ask? My guess is that the “unwind” part of this will take a few days and the “correction” part of this move, which was needed (as long as you’ve held the positions for a while) will last a week or two.

In my experience, I have found that having some idea of what to expect helps me keep my emotions in check, which tends to produce better decisions – especially when things appear to be falling apart at the seams.

Now let us get to the technical analysis…

S&P 500 Short-term (SPX)… I will start with the daily chart perspective as it struck of a buying climax in the short-term. My interpretation? On one hand, the correction is not likely over yet, but a daily upswing attempt is probably coming – and the Buyer’s will have to prove that this will not turn out as a 2-Try Reversal Trade Setup.

On any downside move, we have very prominent Key Support Levels at the August 3rd Gap and the Compression Breakout Support Level.

The key takeaway from this analysis I want everyone to pay special attention to is the Momentum Oscillator (MACD). As Price and Time come off, the first touch of the Zero-Line of the Oscillator is highly reliable for a bid in the market. I am telling you this now, so you have the time to gather some dry powder when that day comes to put it to good use. As the future will come into fruition, we will bring Market Profile, Key Levels, and the MACD into play to capitalize on the perfect timing for a long-term position trade.

In Credit Markets’ point of view, high-yield corporate bonds (HYG) did not decline as abruptly Thursday and Friday, and the volume coupled with the piercing tail point to no selling stampede on Friday. But, the daily setback in investment grade corporate bonds (LQD) on Friday was pronounced.

No rush in Gold (/GC) to liquidate longs, and with the current consolidation I am still under the impression of a Bull Flag or Symmetrical Triangle Price Pattern (however extended in time, because the king of metals had quite a run since recovering from the March deflationary collapse).

Copper (/HG) took off like a bat out of hell on Friday, showing signs that it is not rolling over either. The upcoming sessions will be telling but I look for its uptrend to stay in tack at least till $3.30 ish before a possible pause/pullback.

To wrap-up this Market Trading Report, the key culprit of declining S&P 500 was technology (XLK) – its volume itself calls for caution as the correction here is not likely over yet. Despite Thursday and Friday’s profound setback, the S&P 500 is still in a Bull Market. The correction though appears likely to have a bit further to run in time, as a minimum. The autumn season storms have arrived, but the medium-term picture remains bullish.

Charts of Interest:

Dave & Buster’s Entertainment Inc. Dave & Buster’s Entertainment, Inc. is an owner and operator of high-volume entertainment and dining venues under the name Dave & Buster’s. The Company’s concept is to offer its customers the opportunity to Eat Drink Play and Watch all in one location. Eat and Drink is offered through a menu of Fun American New Gourmet entrees and appetizers, and a selection of non-alcoholic and alcoholic beverages. The Company’s Play and Watch offerings provide an assortment of entertainment attractions centered around playing games and watching live sports and other televised events. Its customer mix skews moderately to males, primarily between the ages of 21 and 39. As of January 29, 2017, the Company owned and operated 92 stores located in 33 states and one Canadian province.

Dave & Buster’s Entertainment Inc. (PLAY) is my “Chart of Interest” this week. Full disclosure, we personally own this in the portfolio as we thought market participants overreacted to the Covid-19 threat. The company reports its second-quarter earnings on Thursday, September 10. With that said, taking positions on stocks that are expected to beat earnings expectations do increase the odds of success. Therefore, it is worth checking a company’s Earnings ESP ahead of its quarterly release.

As far as technical analysis is concerned, I will keep it simple… We feel at this point there is a very high probability this company will not go out of business, so at this point we have no stops in place. Any dip will be an accumulation phase as a larger percentage of the portfolio. You do have nice Consolidation Box Range from $11 to $14, I like the momentum oscillator moving to the zero line on the weekly chart with plenty of room to run. You have the first targets of the Gap at $27.08 coinciding with the 50-period weekly moving average sitting around $26.68. I want stress for us, this is a long-term investment trade, ultimately purchasing in pullbacks with portfolio examination as stock gets closer to ~$55 ish.


Embrace your subscription here with Pries Capital. As you work your way through your subscription, remember that this is not all-encompassing. It is a 40,000-foot view of how day trading/investing works & is designed to give you the basic information to get past the all-important question of how to get started. As time goes along, make note of any questions or highlights, & then come back to Jason, whether email or by phone, & ask questions to learn more about anything on your mind. Pries Capital is a community of all diverse types of day traders and investors, so begin participating, learning, & growing.

With that said, “We have great challenges & great opportunities, and with our help we’ll meet them together!” – Jason Pries

Trading Defining “R”

This week’s article, I want to focus on Van Tharp’s “R” from his investment book, Trade Your Way to Financial Freedom. Thanks to understanding “R”, I can honestly say I’ve been more profitable and on the path to becoming a far more consistent day trader.

What is “R” and How is it Used?

R is simply the dollar $ risk per trade. It is another way of looking at a profit vs loss ratio.

Example 1

Let’s say for example you buy 100 shares of stock at $100 per share, so total investment $10,000. If you define your cut off point at $97 and set a stop loss order accordingly, 1R is $3 and your total Risk $ is then $300 (100 shares x $3 per share).

If the stock trades down to $97 and you are subsequently stopped out of the position, your net loss is -1R (-$300). Alternatively, let’s say the stock moves up to $106 and then you sell for a +$600 profit, that would be a +2R winner.

Example 2

Now, let’s say you bought 10,000 shares of the same stocks at $100 per share. Using the same $97 Stop, your risk is $30,000 instead of $300, however it is still 1R.

By translating each trade into R terms, you open yourself to a new state of mind and your ability to manage positions becomes far more effective.

Position Sizing Magic Using R

By thinking in terms of R and calculating it with each trade, you can quickly and easily define risk for each trade. Furthermore, you will realize that despite trading roughly the same amount each time, your trades have been terribly inconsistent.

Let me explain.

Let’s assume you put roughly the same amount of money in each trade. For these examples, we will use $10,000 to keep things simple.

As an example, Apple (AAPL) trading at $467.68, which would buy us a nice even 20 shares with our $10k. If we determine our stop to be $460, our total risk would be $153.60 (20 shares x $7.68). $7.68 is our initial 1R.

At the same time, we also determine Netflix (NFLX) to be a strong buy candidate, which is trading at $302 even. Trading the same $10,000, we can buy an even 30 shares (avoid odd sizes, ie 43 or 67, whenever possible). Let’s say we feel $300 is key support, so we set our stop at $299, thus our total risk is $90 (30 shares x $3). $3 is our initial 1R.

This is where it gets interesting.

Let’s say both stocks run 5% higher and we sell to lock in a profit. Our Apple trade would yield us $467.68 in profit (20 x $23.38), and our Netflix trade would return us $453 (30 * $15.1) in profit.

$467.68 (AAPL) and $453 (NFLX), both roughly 5% profits off each initial $10,000 investment. Great right? No problems here.


The difference is that with Apple we risked $153.60 to make $467.68, so using R our return is +3R, whereas with Netflix, since we took less risk ($90), our return is actually +5R. A huge difference of 60%+!

Now imagine making 100s of trades over xx years without using R vs using R. You can quickly figure out that your returns would differ dramatically.

By defining risk using R, a completely different story is told under the surface. Not only can you manage positions equally (risking the same amount $ on each trade), but you can tweak your strategies to focus on higher Risk / Reward trades moving forward.

“R” is a Tool to Limit Risk

Many, many, many successful traders over the years talk about limiting risk as one of the critical keys to long term success with day trading:

“At the end of the day, the most important thing is how good you are at risk control. Ninety-percent of any great trader is going to be the risk control.” – Paul Tudor Jones

“The elements of good trading are: 1. Cutting losses, 2. Cutting losses, and 3. Cutting losses. If you can follow these three rules, you may have a chance.” – Ed Seykota

“The golden rule of trading is to keep losses at a level of 1 R as often as possible and to make profits that are high-R multiples.” Van Tharp

By defining R with each trade, you have the power to quickly determine not only what your R value is for winners, but also losers.

Look at your losers and see if you have ever lost more than -1R (your original risk). More than likely you have. The question is how much more and why.

It is common to experience slippage and have orders executed lower than the preset stop. This is especially true for those trading larger position sizes. So, a -1.1R might be common. But, if you are seeing -2R, -3R, or heaven forbid -4R losses or more, you have identified a serious flaw in your trading. You can’t cut your losses!

Create a new column in your excel sheet Trader Worksheet right next to your % return column so you can see the R result to quickly analyze past R values. Then, average them together to determine your average R.

It is inevitable that you will have losses over -1R or less than -1R. But they should never average out to anything below -1R. If they do, you have one big hole in your trading, which is a good thing, because it means you have room for improvement.

Just like the most successful day traders of our time, you too can cut your losses short, and by using R, you can quickly determine how well your efforts have panned out. Do it!

Determining Strategy Success Using “R”

The last piece of calculating R is determining the overall success or failure of any given trading strategy.

With all your trades logged away and organized by strategy, you can quickly determine the real results. Take all your R returns, sum them up, and you will have your net R return for that given strategy or group of trades.

If it is positive, congratulations. If it is negative, congratulations as well, you have an opportunity to make a change right now today and improve as a day trader.

Whether you are a day trader or a long-term investor, the end goal is always the same: return maximum R in the shortest amount of time.

You might think that your long-term strategy that yields a 100% return, a +10R winner, is your best. However, if each +10R winner takes you on average 3 three years to achieve, you may find that your shorter term trading strategy which yields one +30%, +3R winner every 6 months is more successful and a better place to focus your energy.

Remember, the R $ dollar value is ultimately irrelevant once it is equalized for each trade. If your R is $100 for every trade you make, then you can use R to quickly calculate success. +30R over 20 trades means a +$3,000 return, and so on.

Day Trading is about long term sustainability. Learning to always calculate and think in terms of R is a great step towards getting there.


In conclusion, “R” can be broken down as follows:

  • R is total $ risk. If you buy 100 shares of a $100 stock and your stop is $99, then your initial risk is $100 (100 shares x $1) and 1R equals $1 ($100 purchase – $99 stop).
  • By calculating R for each trade, you will learn that the total $ amount invested in each trade does not matter, it is total amount $ risked (initial R) that matters.
  • No two trades are equal unless they have the same initial R value. A +$500, +5% profit as a +5R return is far better than a +$500, +5% profit as a +1R return simply because there was far less risk required to achieve the result.
  • To determine success of a strategy or group of trades, determine the net R for each trade then sum them together. Average your losers together to ensure you are always cutting losses short.
  • Using R is one big key towards long term sustainable, successful day trading.

Still interested in understanding more when it comes to successful day trading defining risk as “R”? If so, contact our firm at 843-999-1570 and someone will be able to explain more in depth of what you need to know when it comes to becoming a consistently profitable trader! With that said, “We have great challenges & great opportunities, and with our help we’ll meet them together!” – Jason Pries

Proprietary Trading Firm

What is Proprietary Trading?

Proprietary trading refers to a financial firm or commercial bank that invests for direct market gain rather than earning commission dollars by trading on behalf of clients. Also known as “prop trading,” this type of trading activity occurs when a financial firm chooses to profit from market activities rather than thin-margin commissions obtained through client trading activity. Proprietary trading may involve the trading of stocks, bonds, commodities, currencies or other instruments.

Key Takeaway

Proprietary traders may execute
an assortment of market
strategies that include index
arbitrage, statistical arbitrage,
merger arbitrage, fundamental
analysis, volatility arbitrage,
technical analysis and/or
global macro trading.

Financial firms or commercial banks that engage in proprietary trading believe they have a competitive advantage that will enable them to earn an annual return that exceeds index investing, bond yield appreciation or other investment styles.

How Does Proprietary Trading Work?

Proprietary trading, which is also known as “prop trading,” occurs when a trading desk at a financial institution, brokerage firm, investment bank, hedge fund or other liquidity source uses the firm’s capital and balance sheet to conduct self-promoting financial transactions. These trades are usually speculative in nature, executed through a variety of derivatives or other complex investment vehicles.

Benefits of Proprietary Trading

There are many benefits that proprietary trading provides a financial institution or commercial bank, most notably higher quarterly and annual profits. When a brokerage firm or investment bank trades on behalf of clients, it earns revenues in the form of commissions and fees. This income can represent a very small percentage of the total amount invested or the gains generated, but the process also allows an institution to realize 100% of the gains earned from an investment.

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