Renko Biotech Position Trading For The XBI ETF

Renko biotech position trading using the XBI ETF is also being evaluated for addition to our Renko trading method.  Similar to VXX volatility position trading, I first started this biotech ETF, using the Renko chart, at the end of November 2017.

Again, the purpose of the evaluation is for replacing an underlying that has been traded with a 60-minute bar chart with a Renko chart.  I am doing this for the purpose of determining whether there are position trading benefits when using the chart style made of Renko bricks.

The Renko chart that is being used is a Renko 25 brick.  This means that there will be 25 ticks of price movement before a brick is completed and new brick will be started.

Renko Charts And How Renko Bricks Are Made

Renko Biotech Position Trading Pros And Cons

  • Trading the XBI biotech ETF replaces the single stock risk inherent in biotech stocks, especially this group that are smaller cap and more highly volatile
  • On 12/27/2017 there are currently 109 holdings in the XBI, with the top 10 holdings comprising 16.30% and the largest single holding only 1.68%
  • The 30-day average volume for the XBI is 3.88 million, giving good enough trading liquidity
  • There is a current short availability on Interactive Brokers of 1.2 million shares, which is important since the Renko position trading method trades long and short
  • However, although the trading volume is fine for the XBI, we do not have the same options open interest and liquidity as the VXX volatility options – consider a comparison of XBI and VXX options:
    • XBI 86.00 February 89 call [position is long] = 3.5% out of the money – 1.55 last price 18.9% implied volatility with 416 open interest
    • VXX 27.35 February 25 put [position is short] = 8.6% out of the money – 1.25 last price 59.4% implied volatility with 11,006 open interest

So, the options are a con for our Renko biotech position trading, and this has nothing to do with using a Renko chart of a 60-minute bar chart.  As you can see, would are limited in how far out of the money we can sell options and the premium and implied volatility we can receive.  You can also see how this is not a problem with VXX position trading.

  • But the XBI options are far better than the QQQ for the same comparison, although not for open interest:
    • QQQ 157 February 160 call = 1.9% out of the money – 1.50 last price 11.92% implied volatility with 17,523 open interest
    • It would take relatively little movement to have this option become in the money, always a problem if the position is uncovered and/or protecting a QQQ position and keeping it covered

Renko Biotech Position Trading – Setting Up The Chart

As mentioned above, the XBI Renko biotech position trading chart will use a 25 brick size.  So, each of the bricks you can see on the chart have 25 ticks, or in the case of the XBI cents, of price movement to complete a brick.

Note that any of these bricks could have had as much as 49 cents of movement, but that additional 24 cents would not show on the chart because it was not enough movement to complete the next brick.  In light of this, it is a good idea to also use the 60-minute position trading chart, in order to see all prices.

The chart will also have the symbol properties include extend trading hours.  The red and green bricks are real-time hours, with the gray bricks that have red and green outlines being extended hours.

Renko Biotech Position Trading Chart

The XBI Renko chart will also include our Renko method trading indicators:

  • Price envelope [ttEnvelopeR] – this is the indicator on the Renko bricks
    • NOTE:  the envelope percentage parameter for the red and green dots, above and below the midline, has been set to .7
  • Slow Momentum [ttMEx] – blue-purple line[s] indicator below the Renko bricks
  • Fast Momentum [ttExtreme] – yellow line indicator below the Renko bricks that is overlayed on slow momentum

Here are a couple of links to posts that will give information for our Renko trading method trade setups and trading indicators:

NOTE:  these posts were written for Renko day trading and there has been a setup change for Renko position trading.  The setup that I am referring is called the price extreme reverse.  This is a profitable day trading setup, but I do not want to use this in Renko position trading and for trades that are being held, instead of reversed multiple times in a day.

Although we will not use the price extreme reverse for XBI trading, we will use it for Renko position partial profit taking and for options trading.

Renko Biotech Position Trading Video

Renko biotech position trading introduction, for trading the XBI ETF using the Renko trading method.  Like the Renko VXX position trading, we will use a 25 Renko brick chart.  And we will also include the 60-minute bar chart in the workspace for identifying significant trading prices, as well as price patterns and additional trade setups.

  • Discussing the XBI ETF and its suitability for our position trading method, including directionally trading the XBI long and short along with counter trading options for income and/or position hedging
    • The Renko biotech position trading chart shows far more movement and price volatility than the SPY
    • For instance, there are only 9 SPY days for the whole year that have more than a 1% net change, compared to the XBI that has 62 days with a 1.5% or greater net change
  • Additionally, the XBI spent more time above and below its fifty-day moving average, making it more tradeable for Renko position trading in both direction
    • As a result of the bigger percentage net changes and price movement in both directions, the XBI options have a higher relative market implied volatility, allowing for option selling further out of the money
  • Renko XBI position swing1 = sell 87c 1.77 when price is at 83.00, giving 2.77 room above 86.00 resistance
    • A put was also bought, giving a synthetic option short to hedge an open XBI long position – the Renko biotech position became net short on the next completed brick when the long was exited on a Renko price envelope reverse
  • Renko XBI position swing2 = position profit taking after an 8 brick price extreme reverse, but no options were traded because there was still MEx flow down -vs- a momentum extreme
    • The short position was then exited on a midline reject with MEx flow-fast momentum hook and resistance break, and then a long position was entered on a 2nd midline reject with MEx flow and a fast momentum hook

The remainder of this Renko biotech position trading video discusses the additional trades for both the XBI directional setups and options BUT also making the following point:

  • The VXX and the XBI are being traded with the same Renko method, there are not trading adjustments being made because the 2 underlying are different
  • This is an important consideration because there would not be a consistent Renko position trading method if we couldn’t make the same basic trading decisions for each underlying we might trade

Renko Biotech Position Trading Chart

 

Renko Chart Position Trading Training

Member’s Section:  Renko Position Trading Training Videos

 

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