How history helps your intraday setups
Here’s a nice trade that set up on Wednesday morning, June 7th, 2006.
It provides an excellent example of how data-driven historical analyses can be
blended with a real-time feel for the market to create winning trades.
As noted on my
research blog that morning, the previous day’s market had displayed both a
high degree of institutional selling and institutional buying. This meant
that large market participants were active on both sides of the market.
The blog indicated that, when that occurs, the odds of the market closing higher
the next day were quite good: about 2:1. That was one of several analyses
that had me leaning long early in the day.
In the opening minutes of trade on Wednesday, however, we traded to the
downside. My goal was to look for a waning of the selling pressure, with
price holding above the previous day’s low, to take advantage of the bullish
historical bias.
As the chart below shows, we got that setup:
This chart is taken from the Market
Delta program, which segments volume traded at the bid vs. offer
prices. This information tells us whether sellers have been more
aggressive (red color; more volume at the bid) or buyers (blue color; more
volume at the offer). Please note that I am not affiliated with Market
Delta and do not receive compensation for mentioning them. It is a program
I use in my own trading that I have found helpful in identifying intraday
setups.
Let’s take it step by step:
1) We hit a new low for the day on the S&P futures at the 8:45 AM
bar, but then buyers emerged in size consistently lifting offers all the way up
to 1264.
2) The next pullback occurred on lower volume and with less volume
occurring at the bid.
3) The market tried one more pullback at the 8:55 AM bar, but this
quick petered out on still less volume. We have our setup: selling has
dried up at a point above the previous day’s low.
4) The inability of the market to make a single print below 1262.50
emboldened the bulls, who again started lifting offers in size. Notice
volume at the offer expanding as we move higher: a telltale sign of a good
intraday move.
5) We want to ride the move as long as it will take us. The
bottom numbers (the last of which are circled) represent the number of contracts
traded at the offer minus those traded at the bid. As long as that number
stays positive (color stays blue), it makes sense to stick with the trade.
The historical analyses helped provide a directional bias for trading, but
the intraday analysis was crucial to the execution of the idea. It *is*
possible to be a quantitative, systematic trader and a discretionary one. The best trades, I find, come from
the head–and the gut.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
His book, Enhancing Trader Development, is due for publication this fall
(Wiley).