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.Â
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.
| Support/Resistance Numbers for S&P and Nasdaq Futures |
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