How to Take Advantage of Intraday Swings in the E-mini Market

Pure intraday trading means flat all positions outside of pit-session trading hours, or at the most, it means being present in front of screens while working stretches of the overnight session.

There are several benefits to limited trading exposure. Near elimination of large adverse moves against a position is one, although trading the S&P 500 E-mini (ES) allows use of protective stops through the overnight period that will in most cases be executed. Other E-mini symbols trade too thinly outside of pit-session hours to trust protective stops against extreme overnight moves without serious loss potential.

Intraday trading is not strictly for retail or smaller account balance traders, either. Plenty of serious professionals either reduce capital exposure overnight or avoid it altogether. There is enough price movement between pit-session bells for anyone to profit from with a strong reward-to-risk ratio. Whether most traders realize and internalize that fact or not is another issue itself. Fact is, most retail intraday traders work as if just the opposite were true.

Too many trading tactics or approaches are based on eking out tiny profits (with unbalanced risk levels to expected reward) from sideways market action. Instead of trading where the fat profit opportunity exists (directional periods), we see where most intraday traders are steered into sideways price action where gains are limited while losses are not.

Have To Go Somewhere

It's commonly said that stock markets spend most of their time consolidating (i.e. sideways) and a minority of time moving up or down in directional - trend fashion. That's more true of day to day price behavior than it is purely intraday. Markets exist to perform price discovery, or in other words move from one area of clustered stop orders to another. If you really think about it, price action is merely the act of finding and executing stop orders to buy or sell a security. If price action were to go nowhere but sideways all the time, stop orders would never get hit. Nil trading would result, and market action would literally cease to exist.

Tuesday September 9th was one of many pure trend day examples. Price action covered more than 45 index points from high to low, in just about straight down fashion. The early drop was consolidated midday, and subsequent break near the 2 p.m. EST hour led to a larger decline into the closing bell from there. Price action spent most of the day going directional, with brief periods of sideways consolidation in between.

Days like this are obviously the exception, but do offer exceptional profit potential in return. Catch one or two big swings from a day like this and your entire week (or month) of cumulative profits can be had. Really big money from trading always comes from catching big chunks of profit along the way. It's fine to sprinkle in some small to medium sized trade wins along the way, but account balances always grow strongest equity curves with an approach that's geared to hunting big wins in any market.

Many days we see price action open at a certain level, trade significantly higher or lower (or both) and then settle at the close nearly unchanged for the day. Looking at price movement from the settlement close relative to the prior day's close would mean nothing much happened. But... measuring potential from price movement intraday would show lots of opportunity to profit from longs, shorts or both.

Knowing that price action must go somewhere directional more often than not and trusting that it will do so today are two related but different realities. All of us can review enough charts to mentally agree that intraday price movement is significant during part or all of most every session. We can see what happened more sessions than not through history and agree that directional potential through part (if not all) of most every day is a fact. Trusting that this iron-clad historical fact will continue forward from the next session onward is often a different story.

Expecting Directional Profits

As with everything that has to do with our trading profession, capturing big directional profits is a mindset. For example, a day like the one to begin the month of September 2008, where trading began with a big gap-up open. We already know from study and experience that open gaps statistically fill by the closing bell around 75% of the time. In other words, three out of four gap-open events are filled intraday. That in itself is a pretty powerful edge to exploit.

Price action lifts to the daily R2 value, meets stiff rejection and rolls over from there. Visually, we see where sellers stepped in hard. Sell signals from the 1300+ area and then sequentially below were confirming all over the place. Filled short trades anywhere up there can be expected to do what? That's right... fill the open gap near 1280ish. A textbook example of knowing with high degree of probability where price action is probable to go once a certain sequence has fulfilled. Measuring price action correctly will show exactly where to enter short and precisely where the market is most probable to trade into (or beyond) from there.

Yet another example of price action opening/closing nearly unchanged with a whole lot of action in between. No need to play the scalpy-tick games when trading E-mini index markets... plenty of profitable swings run one or both directions more days than not. FOMC event sessions tend to be directional before 2:15 P.M. est and wildly gyrational afterwards. On both side of the news release, large profit potential exists for directional trades.

Summation

Over the course of time, four out of five sessions on average will offer moderate to large directional price swings somewhere intraday. Most retail traders fixate way too much on each individual trade, as if it's any more important than the next ten trades to come. But I digress... that's a topic for a complete discussion itself somewhere down the road. Taking each intraday trade with expectation that it will run for distance will (if by nothing more than random chance) certainly see a number of them do exactly that. Building a widely favorable risk/reward scale is the only way to grow an account balance steadily with consistency. Holding for the moderate to large profits that already exist is nothing more than patient execution in the trades you already take each day.

Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures 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. Click here to visit CoiledMarkets