I received an unusual number of frustrated emails from traders after yesterday's strong trend day. All of these were daytraders, and all were not able to capitalize on the trend day. Frustration over missed opportunity led to attempts to make up for the deficient performance, which then worked against them and created losses. What to do about such a situation?
First off, let's get expectations right: daytraders, on average, will tend to underperform on trend days. The buy and hold trader will, on average, milk more of the move than someone who tries to enter and exit many times in a one-way market. In addition, many trend markets start strong, meaning that daytraders who wait for an indication of direction for the day will generally enter the move once it's under way. That's tough, especially when the trend day follows some choppy, range days. The intraday trader who gets frustrated because he/she doesn't catch the entire move is probably feeling as much frustration from perfectionism as from market action per se.
(One common version of perfectionism: waiting for the trending market to pull back before participating in the move. By definition, trending markets are not going to give sizable pullbacks; they tend to be one-way markets. This doesn't mean you have to buy highs and sell lows on such days; it simply means you redefine the notion of pullback. In my trading, I use pull backs to negative NYSE TICK as one guide).
Second, let's recognize that catching trend days is essential to success in the recent market. I notice that Rennie Yang of Market Tells points out that we've had more such days in the past year than in the past decade. Fighting such one-sided markets is a recipe for losing. In such a situation, frustration is a completely appropriate response, speaking to the need to identify trending moves as early in the day as possible. Focusing on frustration as the problem misses the reason for the frustration in the first place: the difficulty making early identification of trending moves.
One way I like to channel this frustration is toward studying the characteristics of the kind of trading day I'm trying to master. By studying many examples of trend days, you can find common features and learn to identify and act upon those in real time. Here are some features to look at:
1) Breakouts from short-term ranges (overnight range, previous day's range, multi-day range, opening range) on strong volume;
2) Persistently strong NYSE TICK (note that we didn't get a -500 reading until almost noon CT on Tuesday);
3) Persistently skewed volume at offer vs. bid for ES futures (This shows up nicely on a Market Delta chart; the cumulative Delta moves steadily higher, as large traders keep lifting offers);
4) Strength in market's leading sectors (Note how, once again, financials led the way for the broad market on Tuesday);
5) Confirmation from correlated markets (Note the upswing in interest rates/decline of bond prices as the flight to quality unwound; the Yen weakness);
6) Extreme readings in the day's advance-decline readings and TRIN.
Because trend days open near their lows (highs) and close near their highs (lows), you're generally safe entering on pullbacks in NYSE TICK. Entries after relatively flat price corrections often work well also.
But nothing substitutes for studying these markets and internalizing their distinctive features. The best treatment for frustration is prevention.
RELEVANT POSTS:
Catching Market Breakouts
Identifying Breakout Moves
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7 comments:
Loved this post. Yesterday I netted a small profit, but not nearly what I could/should have made had I traded the trend more effectively. After the close, I was thinking that I really need to find a way to better take advantage of trend days (I day trade and tend to do better with range days). So I was delighted to find these suggestions this morning.
Thanks again for all the great information you share with us!
Brett
Your say:
The buy and hold trader will, on average, milk more of the move than someone who tries to enter and exit many times in a one-way market.Unquote
From my overall trading performances, I have concluded that is it better from the start to learn swing/position trading.
Hence, my approach to newbies is to advise them to learn to buy/sell and hold.
Great post. But I would tend to disagree with something, and possibly highlight some things to the benefit of other day traders.
I think day traders stand to make much more from trend days than the buy and hold traders if they know how to capitalize on them. The reason for this, in my opinion, is due to the potential for day traders to get in on relatively tight stops and thus obtain very high reward-to-risk ratios. Moreover, these trades can be supplemented with numerous high probability scalps during the day, which the buy and hold trader won't partake of. It's actually for these reasons that trend days are my most profitable days as a day trader. In fact yesterday, even though I didn't play it very efficiently at all, netted me more than half of my last month's cumulative profits, which itself was a decent month.
The key, for everyone's benefit who may wish to be able to play these days better, is to be able to recognize the POTENTIAL for such a day early on, and then look for confirming signals in early trading. For instance, very large gaps that gap above more than one day's value area and range are a big clue that a trend day can ensue. Also, these days tend to open and drive in the direction of the gap, many times taking out nearby resistance in a seemingly easy manner. The combination of both of these things yesterday, along with a lot of the stuff Dr. Brett mentioned, prompted me to enter long just 12 minutes into the day's trading, with a tight 20 point stop on the YM. Then the key is to let profits run even after the market extends. I let it run 100 points and took profits as the Nasdaq hit major daily resistance (usually these days tend to trend until the close, but given the large resistance and how the larger downtrend has been killing off any extended moves to the upside quickly, I thought we would settle in a largely sideways range even if we held up). Now sure the trend went on to go for another 130 points or so, making it seem like the buy and hold traders benefited more, but realize that due to their larger time frame their original stop was probably quite large, while my tight stop allowed me to have a much larger position size for the same % risk, and gave me a 5 to 1 reward to risk trade. By contrast, a buy and hold trader probably didn't see more than a 3 to 1 R/R from the entire day given that their original stop was likely much larger and thus implied smaller position size.
Subsequent to the initial aggressive position (and again the key is to be aggressive and just get the trade on in these environments that offer large potential reward to risk), numerous scalps were available during the day on the sharp tick pullbacks, especially to price symmetry (i.e. these extreme one way days tend to be gradual stair-steps with similar sized retracements. So see the average retracement early on, and look to enter when similar sized retracements occur, expecially on extreme tick readings). Also, great set-ups occur during trends on false break downs (false break outs for down trends). The final half hour false breakdown is a great example. Traders get caught on the wrong side of the trend, and this sets up a high odds play with a tight stop with the trend.
All of these things combine to make true trend days potentially the most profitable day for day traders in my opinion. What you need to do is review as many previous ones as you can and learn their behavior. And the more screen time you get the more you'll be able to almost feel them ensuing right at the beginning of the day.
As a side note, I think the most understated skill a trader can develop is to be able to balance aggressiveness with caution. Most days require the latter, but on occasion you need to switch mental gears very quickly and be quite aggressive. In reality, knowing the behavior of trend days will do you no good unless you can take advantage of it with the right mental state, which is to be concerned foremost with getting on board, and not being scared to use tight stops once you develop good timing.
Hope it helps...
Hi Brett
It may sound strange but I agree with everyone here even though there are conflicting sentiments.
Definitely - day traders will improve their bottom line if they learn to distinguish trend day potential. Failing to do so can be dangerous to one's pocket. Your post went a long way to providing a resource to spot trend day potential.
Another resource is the Market Profile. Jim Dalton's 'Mind Over Markets' is a great learning asset, especially for this topic.
BTW: famed Bond pit trader Tom Baldwin used to say that he'd give back a month's fading profits on a trend day. At least lavonne made a profit. Well done lavonne!
But, I also agree with Ana. Many day traders I have met are not suited to this timeframe.
I believe that the main component of timeframe suitability (like trading style and tools) is our personality. They would be better off with swing or position trades -Ana's 'buy and hold'.
Here's why: a trade requires two different states of mind. In the setup state, we need to be patient, letting the market reveal its hand. In the action phase, once the setup and trigger patterns are complete, we need act promptly and decisively.
The shorter the timeframe being traded, the more the two states tend to merge.
For many, this merging just does not suit their personality. Yet they continue to day trade usually because they are insuffiently capitalised for a swing or position trade; and/or they have a fear of gaps.
Finally, Brett - thanks for your blog. It's a fab resource on many topics. I am sure it's appreciated by all your readers.
ray
Buy low, Sell high
or
Sell high, Buy low
I know trend traders argue that a price is never to low to sell or to high to buy, but my approach is a lot safer!
You don't know when a trend day will develop, but if you trade in the direction of the longer term trend (for intraday trading use a 15 or 30min chart on indexes) my approach makes sure you are in the trade, when it starts trending.
And if the pullback you used as entry really signals the trend change (and there is just ONE real trendchange) then you will be stopped out at a less damaging price for your account compared to the trader who bought high or sold low.
Sure, you will miss a trade, a breakout or breakdown, because you waited too long to commit. But if you do the math, most actually 70% to 80% of the rangebreaks fail before a real trend emerges, so by waiting you usually will get another chance to enter. Just have patience.
For some time now we see high volatility in stocks, futures or commodities, so there is enough meat for intraday traders, even if you miss one trade. If you expand your trading to different classes of trading vehicles, you will notice, that you no longer depend on one signal. If you miss he bus on equities, because Mr. Bernanke gave the go ahead in his speech, the market reacted, but you were getting yourself a new cup of coffee, take a look at currency futures or oil futures or gold futures or treasuries or soft commodities. You will notice, they don't move in sync! They have their own patterns, they often move non or only loosely correlated to other markets, so you might catch the ride there, when you missed it in the ES.
About 15% of the days are trend days. If they do not damage your account and you make sustainable profits the other 85% of the market days, you should be well off.
Thanks, all, for the excellent comments on the post. A key, key question for the intraday trader is, "What is the likelihood that the move I'm perceiving in the present time period will continue into the next period?" That is, when is a directional move likely to continue, and when is it likely to reverse. The inability to identify and utilize tools for answering that question costs traders a great deal of money.
Brett
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