Intraday traders should rethink their approach

Wow! Today is the type of session emini traders dream of in their wildest fantasies. Pre-market news reaction that spiked price levels in the Globex to new recent highs. An immediate sell-off rapidly ensued... pushing pre-market levels right back to where they began before inane econ reports were released.

Finally, emotional buyers pressed the opening bell right back up in a spate of panic buying, afraid to miss the next dip. When they failed to push past pre-market highs and then stalled, selling pressure rained down on the charts on high volume with gusto.

ES (+$50 per index point)

ER (+$100 per index point)

S&P 500, Russell 2000 and all other emini symbols were in straight sell mode all day. The measured drop essentially bottomed by noon, with price action coiling sideways at session lows and on top of daily-chart support layers (not shown) for two hours hence. With the ES posting a 17+ point range and ER an 18+ point total range, it remains unknown at the time these charts are recorded how the day will end. That said, traders who sold with the flow and rode those easy trades down shouldn't really care what happens in the end. An entire week's worth of profit potential (or more) was readily available before 1:00pm EST.

Other Than Today...
Even though I began this specific article topic on Thursday night, I'm sure today's market action profiled above might have you think, "Sure Austin, that type of directional stuff worked today. But what about all of those sideways sessions we've seen in the past?"

First of all, we must define "normal" market action and build our trade methods accordingly. It does no good to design an approach which works best in tight range, micro-coil sessions where price movement is unusually low. That type of method curve fitting to temporary, abnormal market action only results in consistently miserable failure thru normal to wide-range price movement.

ES (+$50 per index point)

Thursday 4/06/06 was nothing more than a mundane session in the emini futures market. Price action opened and closed nearly unchanged. Early and late in the day, price action coiled sideways in consolidated, choppy fashion.

Late morning to early afternoon saw two directional price swings: a nice leg lower that covered nearly -8pts downside followed by a staged move upward that covered roughly +10pts from low to high swings.

Directional traders by nature are looking to sell into the early part of that initial leg lower. Once price action confirms a turn and appears to be heading higher, long trade signals at price pauses (pull backs) are the only thought.

As price action continues to fall, directional traders do not attempt to guess where it may stop. They simply assume it will keep going lower until price action itself proves otherwise. By the same token, once they start taking price action upward, measured marks of confirmation long signals into the rise is a directional trader's only objective and thought.

The other parts of this entire session are irrelevant: mere choppy noise that is navigated by controlled loss on trade attempts between directional swings.

ER (+$100 per index point)

Different emini symbol, same story inside Thursday as with most other days. Price action coils and chops in consolidation between intraday swings. Short signals are confirmed into the leg lower, long signals are confirmed once price action turns higher. Exact turns are never caught... which is never the objective. Catching chunks of directional profit from the midst of normal market rhythm is the act of trading in harmony with a market's flow.

Market Expectations
There are two distinct ways to view an intraday market. Many if not most emini traders (known as "the herd") constantly think reversal points. When a market is rising, the emini herd's thought is "where can we short?" while falling prices bring a collective herd mentality of "where can we buy?" as a core market view.

Stopping The Train
That is the "emini herd" mentality: this group views themselves as contrarians, but they really aren't. A majority of emini trading tactics center on picking out price turns. Using tools like oscillator to price divergence, fib clusters of all array, Advanced Get and its various copycats, Elliot Wave, etc.

Those are tools primarily designed to guess where emini price action may stop and turn. In other words, reversal traders always find themselves stepping in front of market action moving against them. That is contrary to natural human behavior, as we are predators (deep down) and instinctively react to something that runs away from us. The "chase phase" instinct to catch weaker prey is natural: the act of standing our ground against something that is heading straight toward us is unnatural.

Chasing The Train
This is why breakout or momentum trading feels good on an emotional level. Whether it works consistently or not also depends upon existing market action. The emini markets in particular are (often as not) volatile, whippy and choppy.

In between going nowhere in staccato fashion, directional swings present themselves nearly every day. Sometimes we experience several waves of price swings intraday, be that in both directions or just one strong trend for the session.

Catching The Train
I'd opine that a vast minority of emini traders, the actual contrarians in reality are individuals who view the market with directional expectations. Directional traders see a market rising, and they focus on seeking pull backs to buy. Likewise, they see markets falling and inherently look for pauses or lifts to sell.

Every trade signal taken via continuation tactics is expected to cover some distance on the chart. It is a pure market fact that numerous 4+ point ES and ER price swings exist within far more sessions than not. In addition to that, many of those price swings cover +6pt to +10pt distance from signals to extremes as well.

If we know such price moves commonly exist in bunches thru any given week of market action, why not expect every trade taken to perform as such? Why not manage every trade as if it will go the distance, knowing for a mathematical fact that many of them will?

By the way, the question above is rhetorical. The answer to why most traders will not manage all trades as if those will each profit big is based squarely on human emotional weakness. But, we'll cover that topic in itself in a section dedicated to efficient management of our inner self.

Siren's Song?
For most (not all) reversal traders, the act of trying to catch exact price turns will be just successful enough to keep the quest alive. Inside any given day, price action will stop and turn to the exact tick at some R1-R2 or S1-S2 value. Likewise, some pivot retracement or extension cluster will call the exact high or low. Waves, cycles and bullseyes hit those price turns perfectly. Sometimes. Other times, price action does not honor any assigned support or resistance and blows right thru in dramatic fashion, likewise taking out their confidence & faith for stepping in front of the next price move headed their way in the future.

Most pure reversal traders observe just enough of this "magic" to feed their hope for calling & catching price turns consistently. I'm quite sure that some traders actually do... they are the few who stopped reading this piece early on out of sheer boredom. For everyone else who has read this far while nodding their head in self-recognition, join the club! I spent years and years of my trading life thinking that the only way to success was by catching the turns. That may indeed be one way of profitable success, but for sure it isn't the only way. 

Stress Relief
I myself and many other traders find that taking trades in harmony with market strength as opposed to fighting directional moves while seeking to catch extreme turns to be much easier on the emotions. We humans are naturally designed to seek prey that evades rather than stalks us. Stepping in front of moving markets on every trade, hoping they will stop takes a physical and emotional toll.

Each time we sell a rising market or buy a falling one, instinctive "fight or flight" reactions kick in. Adrenaline is released, our heart rate and blood pressure increases, our muscles tense... in other words, we experience high stress. That type of continual action conditions a measure of tolerance to those who persist at it long enough. The way our body copes with repeated adrenaline release is a steady drip of cortisol into our systems.

I'm no nutritionist, but I do know that prolonged exposure to cortisol released in our bodies creates all manner of harm over time. That is a known medical fact. Before those physical damages occur, mental = emotional weakness ensues. Bottom line is, traders who subject themselves to the most stressful tactics in attempts to make money subject their mind and body to the most extreme levels of harmful stress our profession naturally has.

If you haven't realized this by now, you will: trading real money in live market action is stressful. Gamblers thrive on the "action" while most people experience long-term but subtle breakdowns in well-being. The fine balance of managed stress and methodical success is key to a long, productive and enjoyable trading career.

Summation
Today was simply a wonderful session to trade emini markets within, and we can rest assured there will be many more just like it and some even better inside this year straight ahead of us. The intraday ranges we enjoyed today from highs to lows were not exceptional at all by historical standards. More volatility and much wider intraday ranges are certainly on their way.

I cannot think of any reason for anyone not to have hit winning trade after winning trade all morning... 100% to the short side, of course. Traders trying to guess where support lies in a straight trend down find themselves exhausted, sometimes broken, dazed and wondering where the train came from that ran them over. Traders who view the market with directional expectation know full well where the southbound train came from: they ARE that train

Trade To Win
Austin P
www.CoiledMarkets.com
(Online video clip tutorials... open access)

Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures, equity options and commodity markets.
Mr. Passamonte's trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York.