Refresher Course
It is interesting when I am working with a new
trader who is familiar with my style and has…let’s say a slightly
different perception of how I trade on a day-to-day basis. The reality of it is
that after he/she is in the office for a while they suddenly realize:
- I do not trade like a man possessed and hooked up to a coffee urn
intravenously - Possess some magical indicator that tells me when to buy and sell.
The truth of the matter is that I exercise extreme discipline when trading (eight
years of sitting in front of the screens does not hurt either). Marginal setups
and shooting from the hip are not part of my game plan. That is my holy grail to
trading.
So lately, at least in my opinion, and as a result of my approach to trading
the market, I feel that it has been too quiet and not offering me a lot of real
quality setups. Knowing that will allow me to make some money each day, and more
importantly, not lose money unnecessarily. It is easier said than done, and I
get the question all the time, "How do you know when not to trade?"
First off, never trade during the morning lull. Secondly, a quick look at a
one-minute S&P futures chart lets me know really quick if anything is going
on. Take a look at the chart below:
Notice how each
move lower, after consolidating, was a very quick and decisive move and greater
than 3 points in range. It is this sharp movement that allows you to get in and
get out with minimal slippage in the underlying stock.
Then compare it with the second chart:
Notice here
that while the overall move down was big, it was more suited to a trader with a
slightly longer time frame. There are no quick spikes down, rather, it is a
grind lower — not the price action you want for an HVT.
The first chart, which shows the Tuesday morning action, depicts
some pretty decisive selling off in a very short time frame. The second chart
shows a good selloff, but is more a grind lower vs. the quick move down. I like
the quicker moves because you get immediate gratification and the trade has less
chance of going against you, while on a grind lower you need to
"nurse" the position and deal with some whipsaw price action. Same
day, just different periods, but radically different outcomes depending on which
one you traded. I traded off the first chart, and watched the second one.
Naturally the question comes up, "But what about that 5 or 7 point rally
at such and such a time?" Sure, easy to see in hindsight, but I would be
willing to bet that at the beginning of that move you were not really
bullish/bearish if you approach the market the way I do, so missing it should
not be frustrating. It never met your criteria to begin with. In fact, let that
large move be a "tip off" to maybe some setups to come. I never want
to be the hero and catch the breakout. I am far more content to sit back and
wait for the entry on the second go around. Again, that is the highest
probability approach.
So when the market gets like this you have 2 options:
- Walk away after the first hour or…
- Push the time frame out.
I do both. I trade the first hour pretty assertively, but then hunker down
and go into the "prove it to me mode" in order to avoid giving away
money unnecessarily. Given that the market at least has good range intraday,
just not the quick moves up and down that HVT requires, it does not mean you
cannot capitalize. The same techniques — buying pullbacks, selling short
rallies — still work, you just need to give them more time to develop and
perhaps reduce your share size in order to avoid getting jigged out. Frankly,
over the last two weeks I have made more money on my longer-term intraday setups
than on my HVT trades. So a combination approach is always helpful, but
especially during this relatively quiet period.
With all the negative news this morning (employment and housing starts) and
last night (EDS and IBM), it appears that the market will once again trade lower
this morning. But as the market has demonstrated over the last few weeks, it has
no intention of making any dramatic moves either way. That being said, I am
looking at 850 on the S&P futures to be a near-term target. I have covered
most of my shorts that were established late last week and on Monday, and the
short setups I am seeing right now do not offer much downside movement relative
to the stop loss that would need to be established. So, from longer-term
perspective I am sitting in cash, but will be on the lookout for high-probability
HVT setups. The most valuable lesson I have learned in recent months is to not
get too greedy with the longer-term setups. The day-to-day, hour-by-hour
direction of the market is just too unpredictable, so pocketing small gains over
and over again appears to be the best way to play currently.
| Intraday Setups |
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| Stock | Action | ||||
| AXP | Short | ||||
| LLY | Short | ||||
| WYE | Short | ||||
Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| *898* | 915 |
| 889 | *900-05* |
| 884 | 896 |
| 873 | 892 |
| 869 | 879.5 |
| 860-64 | *850-53* |
| 850 | 826 |
| *842-43* | 809 |
| *832* |
As always, feel free to send me your comments and
questions. See you in TradersWire.