Intraday traders should rethink their approach
Wow! Today is the type of session
traders dream of in their wildest fantasies. Pre-market news reaction that spiked
price levels in the Globex to new recent highs. An immediate sell-off rapidly
ensued… pushing pre-market levels right back to where they began before inane
econ reports were released.
Finally, emotional buyers pressed the opening
bell right back up in a spate of panic buying, afraid to miss the next dip. When
they failed to push past pre-market highs and then stalled, selling pressure
rained down on the charts on high volume with gusto.
ES (+$50 per index point)
(+$100 per index point)
S&P 500, Russell 2000 and all other
symbols were in straight sell mode all day. The measured drop essentially
bottomed by noon, with price action coiling sideways at session lows and on top
of daily-chart support layers (not shown) for two hours hence. With the ES
posting a 17+ point range and ER an 18+ point total range, it remains unknown at
the time these charts are recorded how the day will end. That said, traders who
sold with the flow and rode those easy trades down shouldn’t really care what
happens in the end. An entire week’s worth of profit potential (or more) was
readily available before 1:00pm EST.
Other Than Today…
Even though I began this specific article topic on Thursday night, I’m sure
today’s market action profiled above might have you think, “Sure Austin, that
type of directional stuff worked today. But what about all of those sideways
sessions we’ve seen in the past?”
First of all, we must define “normal” market
action and build our trade methods accordingly. It does no good to design an
approach which works best in tight range, micro-coil sessions where price
movement is unusually low. That type of method curve fitting to temporary,
abnormal market action only results in consistently miserable failure thru
normal to wide-range price movement.
ES (+$50 per index point)
Thursday 4/06/06 was nothing more than a
mundane session in the emini futures market. Price action opened and closed
nearly unchanged. Early and late in the day, price action coiled sideways in
consolidated, choppy fashion.
Late morning to early afternoon saw two
directional price swings: a nice leg lower that covered nearly -8pts downside
followed by a staged move upward that covered roughly +10pts from low to high
Directional traders by nature are looking to
sell into the early part of that initial leg lower. Once price action confirms a
turn and appears to be heading higher, long trade signals at price pauses (pull
backs) are the only thought.
As price action continues to fall, directional
traders do not attempt to guess where it may stop. They simply assume it will
keep going lower until price action itself proves otherwise. By the same token,
once they start taking price action upward, measured marks of confirmation long
signals into the rise is a directional trader’s only objective and thought.
The other parts of this entire session are
irrelevant: mere choppy noise that is navigated by controlled loss on trade
attempts between directional swings.
(+$100 per index point)
emini symbol, same story inside
Thursday as with most other days. Price action coils and chops in consolidation
between intraday swings. Short signals are confirmed into the leg lower, long
signals are confirmed once price action turns higher. Exact turns are never
caught… which is never the objective. Catching chunks of directional profit
from the midst of normal market rhythm is the act of trading in harmony with a
There are two distinct ways to view an intraday market. Many if not most
emini traders (known as “the herd”) constantly think reversal points. When a
market is rising, the emini herd’s thought is “where can we short?” while
falling prices bring a collective herd mentality of “where can we buy?” as a
core market view.
Stopping The Train
That is the “emini herd” mentality: this group views themselves as
contrarians, but they really aren’t. A majority of
emini trading tactics center
on picking out price turns. Using tools like oscillator to price divergence, fib
clusters of all array, Advanced Get and its various copycats, Elliot Wave, etc.
Those are tools primarily designed to guess
where emini price action may stop and turn. In other words, reversal traders
always find themselves stepping in front of market action moving against them.
That is contrary to natural human behavior, as we are predators (deep down) and
instinctively react to something that runs away from us. The “chase phase”
instinct to catch weaker prey is natural: the act of standing our ground against
something that is heading straight toward us is unnatural.
Chasing The Train
This is why breakout or momentum trading feels good on an emotional level.
Whether it works consistently or not also depends upon existing market action.
The emini markets in particular are (often as not) volatile, whippy and choppy.
In between going nowhere in staccato fashion,
directional swings present themselves nearly every day. Sometimes we experience
several waves of price swings intraday, be that in both directions or just one
strong trend for the session.
Catching The Train
I’d opine that a vast minority of
emini traders, the actual contrarians in
reality are individuals who view the market with directional expectations.
Directional traders see a market rising, and they focus on seeking pull backs to
buy. Likewise, they see markets falling and inherently look for pauses or lifts
Every trade signal taken via continuation
tactics is expected to cover some distance on the chart. It is a pure market
fact that numerous 4+ point ES and ER price swings exist within far more
sessions than not. In addition to that, many of those price swings cover +6pt to
+10pt distance from signals to extremes as well.
If we know such price moves commonly exist in
bunches thru any given week of market action, why not expect every trade taken
to perform as such? Why not manage every trade as if it will go the distance,
knowing for a mathematical fact that many of them will?
By the way, the question above is rhetorical.
The answer to why most traders will not manage all trades as if those will each
profit big is based squarely on human emotional weakness. But, we’ll cover that
topic in itself in a section dedicated to efficient management of our inner
For most (not all) reversal traders, the act of trying to catch exact price
turns will be just successful enough to keep the quest alive. Inside any given
day, price action will stop and turn to the exact tick at some R1-R2 or S1-S2
value. Likewise, some pivot retracement or extension cluster will call the exact
high or low. Waves, cycles and bullseyes hit those price turns perfectly.
Sometimes. Other times, price action does not honor any assigned support or
resistance and blows right thru in dramatic fashion, likewise taking out their
confidence & faith for stepping in front of the next price move headed their way
in the future.
Most pure reversal traders observe just enough
of this “magic” to feed their hope for calling & catching price turns
consistently. I’m quite sure that some traders actually do… they are the few
who stopped reading this piece early on out of sheer boredom. For everyone else
who has read this far while nodding their head in self-recognition, join the
club! I spent years and years of my trading life thinking that the only way to
success was by catching the turns. That may indeed be one way of profitable
success, but for sure it isn’t the only way.Â
I myself and many other traders find that taking trades in harmony with
market strength as opposed to fighting directional moves while seeking to catch
extreme turns to be much easier on the emotions. We humans are naturally
designed to seek prey that evades rather than stalks us. Stepping in front of
moving markets on every trade, hoping they will stop takes a physical and
Each time we sell a rising market or buy a
falling one, instinctive “fight or flight” reactions kick in. Adrenaline is
released, our heart rate and blood pressure increases, our muscles tense… in
other words, we experience high stress. That type of continual action conditions
a measure of tolerance to those who persist at it long enough. The way our body
copes with repeated adrenaline release is a steady drip of cortisol into our
I’m no nutritionist, but I do know that
prolonged exposure to
released in our bodies creates all manner of harm over time. That is a known
medical fact. Before those physical damages occur, mental = emotional weakness
ensues. Bottom line is, traders who subject themselves to the most stressful
tactics in attempts to make money subject their mind and body to the most
extreme levels of harmful stress our profession naturally has.
If you haven’t realized this by now, you will:
trading real money in live market action is stressful. Gamblers thrive on the
“action” while most people experience long-term but subtle breakdowns in
well-being. The fine balance of managed stress and methodical success is key to
a long, productive and enjoyable trading career.
Today was simply a wonderful session to trade
emini markets within, and we can
rest assured there will be many more just like it and some even better inside
this year straight ahead of us. The intraday ranges we enjoyed today from highs
to lows were not exceptional at all by historical standards. More volatility and
much wider intraday ranges are certainly on their way.
I cannot think of any reason for anyone not to
have hit winning trade after winning trade all morning… 100% to the short
side, of course. Traders trying to guess where support lies in a straight trend
down find themselves exhausted, sometimes broken, dazed and wondering where the
train came from that ran them over. Traders who view the market with directional
expectation know full well where the southbound train came from: they ARE that
Trade To Win
(Online video clip
Austin Passamonte is a full-time
professional trader who specializes in E-mini stock index futures, equity
options 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.