Views From The Real World

Spike “V” bottoms late on Wednesday and the resulting follow-through on Thursday
morning provided exceptional market volatility, along with an abundance of short
covering fuel to spur the S&P to new heights on Friday. As I’ll discuss
below, that’s not speculation, for I can still smell the fuel on my hands.

Moving Avg
Legend: 15MA
Larger Timeframe 15MA

See https://www.donmillertrading.com
for Setups and Methodologies

Charts © 2003 Tradestation

When I accepted both the opportunity and responsibility to begin writing for
Larry Connors and TM almost three years ago, I did so largely because I felt
there was a void of trader reality in the general trading “press.” Even
to this day, while one can find hundreds of online (and offline) resources on
technical analysis, stock pick-em services, hype-based chatrooms, many of which
are offered by non-traders, I still see far too little “reality”. A quick
aside, over the weekend I had my first experience watching the Matrix (the
original one as this guy in his mid 40s needed his teenager to get him
interested in it). Too often, I feel this business is a matrix all by itself.

What do I mean by reality? Simple. Sprinkle at least a modicum of focus and
discussion on stops, draws, screw-ups, slumps, liquidity, position sizing, order
entry mechanics, lesser probability outcomes, and personal performance
management issues amidst a virtual world where market calls are always right
both before and after the fact, and trading is 100% about technical analysis,
and that might be a start. Now of course to the credit of some folks, some
such information is out there and I applaud their efforts … but the problem
remains that there’s far too little of it, and the sad part is that I’ll go to
my grave believing, no make that knowing that such content is profoundly
more important than technical analysis in terms of developing self-sufficient
traders.

Well, let’s try to continue our reality trek by looking no farther than my own
personal trading on Thursday. Those that follow my style of viewing the market
in multiple timeframes, know that markets are almost always in two opposing
trends, and Thursday opened with the S&Ps testing both hourly and 120 minute
15MA downtrend supports after Wednesday afternoon’s short covering charge. On
the flip side, the market was testing what has been strong daily support which
had reestablished itself in late November.

And while my intention was to bias myself heavily toward the daily by
mid-morning given its stronger support in terms of angle, directional movement,
etc., I chose to first play ping-pong between the hourly and daily by shorting
the first test of the 60/120 combo. It’s a common sequence as such conflicts
often create a highly fertile environment for scalping — often viewed as a
natural triangle with 15MA boundaries — until the conflict is resolved and the
greater influence takes over.

The problem arose when I had become extremely comfortable — OK, complacent —
with long-standing results of the conflict plays, especially near the open, that
I had a bit too much size and conviction. The complacency was also fueled in
part by a strong personal trade pace over the last few months where personal and
market rhythms have been very much in tune. And as is often the case for me, a
strong trade conviction (not personally biased, chart-biased and based on past
results), will often require a strong market conviction in the other direction
to force me to stop and consider reversing. An example for
E-Mini course students
is the difference between taking 15MA price probes vs. 5MA/15MA turns. And
strong conviction we got as the daily trend quickly extended itself to the
north.

Trade autopsy? While I’d take the same sequence again, I should have done so
with lesser size — not based on the outcome (that’s hindsight BS), but based on
my initial chart bias that had the daily as the predominant trend.
Additionally, both the 60 and 120 pullbacks were testing 3rd and 2nd
pullbacks respectively. At a minimum, that should have told me to trade
lesser size on the downtrend pullbacks and a rock-solid stop. Simply put,
trades and trends which had worked out perfectly on Wednesday, failed as they
often do on subsequent tests. Ironically, this is one of the reasons I
require my mentor students to count and document each pullback entry. As a
result, I began Thursday as a market student taking a jab to the chin.

Now such an beginning typically leaves most folks with various choices in terms
of how (or whether) to trade the rest of the day, including (1) storming around
one’s trading office and cussing; (2) taking the day off due to the lack of a
clear market read and personal rhythm; (3) continuing to trade, yet with
adjusted sizes until in rhythm; and (4) using the market information to correct
trade positioning. I list these options because I chose all four, with some key
modifications: #1 for about 30 seconds, #2 when I left the trading office for
about fifteen minutes to clear my head, #3 with reduced sizes initially, and #4
by focusing on the long side.

Option #4 was clear to me because the best reader of a strong market is likely
one managing a short position, and the larger the pain, the larger the
conviction to the other side. The result was what started off as one of the
poorer mornings in recent months ended with one of the better afternoons over
the same period simply by the subsequent decision to take about every first long
pullback the market offered for the rest of the day — first on the three, then
the 13, then the 30 — as the market cooperated as it normally does when folks
are caught on the wrong side.