Need To Tweak Your Trading? Here Are Some Ideas…
I received a great e-mail from a reader on Friday, and I figured that my
response to him would be rather helpful for some readers who may have had the
same question.
“I have been taking direction from your articles,
but I am losing as a daytrader. Please help me to better understand your
instructions. 1) I buy via pullbacks when they trade through the high of the
signal bar, but only when the pattern occurs at market extremes or is the
first pullback above the day’s opening price. 2) I take the trade regardless
of whether the stock or index the stock trades in is up or down for the day. I
base this on your writing that when the pattern appears, go for the throat and
that Haggerty wrote that when the signal appears, it must be taken. However,
you go on to say to trade with the trend. Does that mean to only take a buy
signal on an up day in the stock’s index and with the stock up for the day and
pass on a buy signal on a down day? Thank you.”
The reader, as it relates to my trading style, is on the right track, but
with a few modifications, I believe he will find it less frustrating to trade
not only this market, but even more so when some volatility comes back.
The most important point that the reader makes is “the trend,” and while he
does not mention it specifically, he is not defining the trend in the way that I
like to view it. Everyone has a different barometer for trend. For me, since my
style is short-term in nature, it can only be determined by the slope of the
moving average. I have said this dozens of time in my column. For me, trend is
not:
- Is the stock/index up for the day?
- Is the trend up on the daily, monthly or hourly chart?
My definition of trend is one thing and one thing only:
What is the slope of the moving average on either
the 1-minute or 5-minute chart going back five or six bars?
Now depending on volatility, or lack thereof, I define trend by one or the
other. Currently, with volatility subdued, I am taking my cues from the 5-minute
chart, not the 1-minute chart. When volatility is abundant, I use the 1-minute
chart.
The reader also addresses entry points as it relates to
the 20-period moving average. The breach of the 20-period MA is not in and of
itself a valid reason to make a trade.
Point X, as seen on the chart above is a perfect
example of how getting short at that time would have resulted in an unnecessary
loss. The trend is up at this point, so why go short? The market gives head
fakes like this all day, so use restraint. The patient and non-impulsive trader
would have waited for a higher probability short entry at Point Z.
Why not Point Y? Simple put, at the time the trend was
not clear. If anything, it was still up, and the moving average did not indicate
with any certainty that the trend had changed. Sure you may have missed out on a
good trade, but the same thing could have happened as did at Point X.
Point Z is the better entry because at this point the
trend is clearly down. Sure the trade may not work, but now you have the odds in
your favor.
As Nicholas Talib eloquently states in his book
Fooled By Randomness:
“I start with the platitude that one cannot judge
a performance in any given field (war, politics, medicine, investments) by the
results, but by the cost of the alternative (i.e. if history played out in a
different way). Such substitute courses of events are called alternative
histories. Clearly the quality of a decision cannot be based solely on its
outcome…”
This line of thinking is what prevents me from taking
trades like the one denoted by Point Y. Sure it may work, as it did, but purely
based on my years of observation that is a trade that has a higher failure rate
than success rate. In knowing that, I do not get frustrated or angered when on
the rare occasion (this instance) the trade works out. Many traders cannot
accept this at their own peril in the long run.
With regard to the signal bar mentioned by the reader
in point 1, I am not really sure what is meant by that. I am not concerned about
a “signal” bar, in fact, I do not use one. For me, a pullback to the 20-period
MA or simply a pullback followed by some consolidation is what I use as my
filter to alert me to a potential setup’s “signal bar,” to borrow from the
reader. Remember, as I have stated dozens of times, the S&Ps are the signal that
gets me into a trade. If the S&Ps do not make a move, it is likely that the
stock I am trading will not move much either. That small time lag between the
S&P move and the move in the stock is the edge that short-term traders can
exploit.Â
Without sounding smug, I have to say that this market
is tradable, albeit very slowly. Traders have always had a tendency to be very
fickle when it comes to approaches for trading the market. Even during the go-go
years, I traded with several individuals who would always be on the quest for
some new system the moment a couple of losing trades were thrown their way. It
was the kiss of death then, and now I would consider the approach the equivalent
of the plague. Focus and discipline is the only thing that will allow you to
navigate these markets. Nobody out there has the Holy Grail, those that are
forging ahead have simply made minor adjustments. I trust my comments have
offered some help if in fact you are feeling the same way that the reader above
states.Â
For today’s session, I feel it will be interesting, and
might I say, a bit more predictable. Monday sessions have offered specific
scenarios in recent weeks, mainly gap openings. Today may prove that way once
again on the heels of Friday’s rather sloppy selloff. The odds of a gap down to
significant support at 881 or lower may very well result in a nice fading
opportunity. Nonetheless, this is an educated guess at best, so take the
temperature of the market if it in fact plays out this way before committing
capital.Â
One potential intraday trade I see setting up is to
play the I-shares Lehman 20 Year
(
TLT |
Quote |
Chart |
News |
PowerRating). For the first time in many sessions, the bond and stock market were
trading in tandem, not in a contra fashion. Technically, bonds broke down on
Friday, and that combined with the weak dollar and rising gold price should
offer some nice short setups in the TLTs today. (Please note these are not
terribly liquid, but are suited pretty well if you are looking to position them
intraday.)
Also keep an eye on
Countrywide Financial [CFC|CFC]. I like the
pattern that is forming on the 30-minute chart. The downward trend channel has
been broken and is now sitting at a roughly 50% retracement of that move (+/-
50.20). A move above 50.35 with the overall market at your back may offer a good
long setup.
Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| *916* | 1044-45 |
| 906 | 1032 |
| *901-03* | 1017-21 |
| 896-97 | 1010.50 |
| 891 | 998 |
| 889 | 987 |
| 886 | Â |
| *883* | Â |
| 876 | Â |
| *861* | Â |
* indicates a level that is more significant
On a lighter note, a reader sent me this very funny article, take a look.Â
https://business-times.asia1.com.sg/companies/story/0,2276,66619,00.html
As always, feel free to send me your comments and
questions.