When (And When Not) To Trade

  • September 12, 2002
  • Dave Floyd

I received a few e-mails over the last few days
regarding my comments about how to be selective and knowing when not to trade,
as well as how I define a trend. If you are new to the markets. or more
specifically new to HVT, I can tell you with
a resounding yes that the last two weeks have been some of the quietest trading
I have seen in many months. This is further confirmed by colleagues of mine in
San Francisco and Chicago.

It is imperative that you do not chop yourself up in these markets and
preserve your capital. Remember, unlike other professions where working
diligently is a sign of making progress, trading when the market is simply not
there is counterproductive. Sitting on your rear end and observing is perfectly
acceptable and correct. I have done less than 25 trades (HVT) all week.
This is not a typo. I suspect, however, that today’s comments by Alan Greenspan
will ratchet up the volatility a bit, let’s hope.

So, let’s review not only some simple rules for HVT, but also
illustrate some simple techniques for recognizing when not to trade in these
markets.

  1. Always trade with the trend. The trend being defined by the slope of the
    20-period (exponential) moving average on a 1-minute chart.

  2. If the trend is up, look to buy pullbacks. If the trend is down, look to
    sell short the rallies.

  3. Each move in the S&Ps must be at least 3 points from peak to trough or
    vice versa. If the range is not at least 3 points, there is not sufficient
    range for you to effectively get in and out of stocks without getting
    chopped up. See chart below. This chart, of the one-minute S&P futures,
    is in a clear downtrend, as noted by the moving average (red line). The two
    blue lines on the chart identify what I consider to be valid signals for
    short sale entries and covering on some underlying stock, while using the
    futures as the lead indicator. Notice how the distance traveled is almost
    exactly three points. Three points is the minimum that I would like to see
    happening time and time again, naturally the larger the range, the better. 
    Contrary to what many people have asked me over the last year, the trend is
    NOT defined by:

            a. The net
change on the day

            b. What
the daily or hourly chart looks like

            c. What
the Dow is doing.

The trend is based on the one-minute chart, period.

4.  Never trade midday (11:30-2:00 PM EST). Contrary to what many
people say, HVT is a losing battle during these times. There is simply
not enough liquidity and quick volatility spikes to get trades done
effectively. Yes, there are good moves during this time on occasion, but those
moves are geared more toward traders with a slightly longer-term time frame.
Remember, the average HVT trade lasts less than five minutes. Lastly,
in my nine years of trading (HVT) rarely have I traded any day during
this time, the exceptions being very active news-related days, similar to late
July of this year. Secondly, my colleagues who run similar trading operations
around the country also report the same thing, their traders leave midday then
come back. I have yet to meet anyone who successfully trades midday with any
consistency, net net, it is a losing strategy. Two dozen successful traders
can’t be wrong.

So that being said, the market needs some news to get it going. This morning’s
unemployment report and Greenspan’s speech may just be the catalyst we need.
Only time will tell. So, remember these rules, they will help you immeasurably.

Intra-/Multi-Day Setups

Longs:


(
AMGN |
Quote |
Chart |
News |
PowerRating),
(
IDPH |
Quote |
Chart |
News |
PowerRating)

Shorts:


(
AIG |
Quote |
Chart |
News |
PowerRating),
(
BBY |
Quote |
Chart |
News |
PowerRating),
(
HD |
Quote |
Chart |
News |
PowerRating),
(
LLTC |
Quote |
Chart |
News |
PowerRating),
(
MXIM |
Quote |
Chart |
News |
PowerRating),
(
SYY |
Quote |
Chart |
News |
PowerRating)

Key Technical
Numbers (futures):


S&Ps
Nasdaq
*925-928* 987
915 *980*
912 960-65
*903-05* 950-54
898 942
892 930
887 916
881
*872*

* indicates a level which has more significance

I trust this article helps clarify things. As always, feel free to send me your comments and
questions. See you in TradersWire.

Dave

P.S. Let me just say, that I have never known anyone in
my nine years of trading that makes money trading midday. And when I talk about
trading, I mean HVT. Trend traders and traders who are in trades for longer than
five minutes can make headway, but HVT and scalpers cannot be effective. There
is a reason why every trading room between the hours of 11:30-2:00 PM EST is
nearly empty. If the trading was good, we would all be in front of our
terminals. So, please, do not send me e-mails saying how good trading was. You
are talking to the wrong person.