If we think of Dry Up Volume as a confirming indicator for pro-rata volume in the same way we use FRV by End of Day to confirm our Dry Up Volume achieved by 11:00 AM, then we already have our built in risk reduction. Eliminating 'short sale trades' from the discussion for the moment, we see that even if pro-rata volume fails to achieve DU by 11:00, we normally see price improvement. This subsequent price improvement allows for a small profit, or at worst, a wash sale. We would exit here freeing up the funds for another equity with a greater money velocity.
I use a 5% stop loss and a 10% target. Using pro-rata volume to enter into a trade improves the the overall performance of the system from a dollar standpoint without increasing the risk / reward ratio. This was the point I attempted to make. While admittedly, I do not have enough pro-rata trades to definitively express the use of pro-rata volume in absolute terms, under current market conditions (and current market conditions may just be the key to determine when and when not to use pro-rata volume) it appears to provide a superior method of entry. Once we enter a period of flat or falling markets, we should have a better grasp of when and when not to use pro-rata volume, as well as, which levels work the best.
Due to my three week vacation, I haven't had enough opportunity to observe this theory in real time. Of the few observations I have made on the subject, the results were positive. Significant more study on this theory is required before I can conclude the technique to be valid. As always, look for updates in the future.
Thanks for your contributions.
- Spydertrader