How I'm Trading The Opening Hour

I have received a number of e-mails lately asking me to highlight some of the trades I am doing in the opening hour (HVT). I figured it would be a good idea to walk you through some of these trades as a way to show you my thought process. One thing is for certain, these quick trades are really only viable on the opening when volatility (what there is of it) is present. After that, the price action is too quiet to effectively implement these trades. At this point, I usually will take my cues from longer time frame charts.

If any of you saw Bloomberg TV yesterday morning, Lewis Borsellino was on talking about the current dominance of program trading. In essence what he was saying is that the rise in program trading in recent months, coupled with a decline in individual and institutional trading, has created a market of extreme choppiness. Normally, programs and active traders exist rather well together. However, when individual trades decline, it creates a very lame environment. His thoughts, like just about everyone else, are that once Iraq gets out of the way, it should bring back more players in the market and as a result make the market a bit more fluid. Let's hope.

On Wednesday, we had a setup that not only qualified based on the rules of an HVT long, but also coincided with some very important technical levels. Naturally the trade was valid without those levels, but with the levels, it becomes a trade that you may want to be more aggressive with in terms of share size. If you are just starting out, this is not advisable. However, once you have the mechanics down, it is an excellent way to increase your profitability. I view this trade as a much better setup, as a result, I will adjust my share size accordingly.

At Point X you have a really nice setup to the longside, a pullback to the 20-period EMA (exponential moving average), the stochastic resetting, and most importantly ,a stock in a slight uptrend. The 32.40 level is icing on the cake. Now fast forward a few minutes. If you were patient and held on to this trade, you will notice that the upward move began to die out at 32.84, another key level (FN) that I use for trading. In this case, it alerts me to the fact that there is resistance here. Normally I will take half my position off at this time and let the other ride. However with market conditions being the way they are, I exited the whole thing.

The reason I put this trade up is because it raises a good question:

Does Point X represent a good entry point to the long side?

        Yes and no. 

Yes the trade worked out, quite nicely in fact, the stochastics were oversold and due for a bounce.

No statistically speaking, these trades rarely work this well, if in fact at all. At that time the trend was down, and the price bars were below the 20-period EMA. This is normally a situation where you are better off waiting for a rally toward the 20-period EMA and then looking for a good short entry. Don't be fooled by this pattern playing out on this one occasion. Taking these trades is dangerous to your trading account.

Point Y is the higher probability entry for a long. Sure the gain was not nearly as much as the entry at Point X, but for me I was comfortable and had conviction taking this trade. I would have had ZERO conviction at Point X. When I have no conviction on a trade and take it anyway (sure it happens), I typically get scared out of the trade really easily.

After going long at 77.15, I knew there was going to be resistance at 77.35 (FN). As was the case with C, I exited the position just under that price. If it went higher, so what? I made my money and was on to the next trade.

This chart just illustrates again the highest probability entry points when using the S&P futures as your leading indicator.

Notice just before 7:00 AM there were two bars that "bottomed out" at the same price. From there the S&Ps went higher. But again, that is a low-probability entry point. Trend is down at this time.

I put this chart in simply as a reference so you know when not to trade. Print this out, paste it next to your monitor, and when your charts look like this, get up, shut your monitors off and hit the golf course.

Don't forget, my new book, "How I've Achieved Triple-Digit Returns Daytrading...4 Hours A Day" is now available. Order today and you will receive a 10% discount.

As always, feel free to send me your comments and questions.

Dave

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