Monday, March 23, 2009

The Trading Rodeo: Staying on That Bull

A very experienced trader commented to me at the end of the day, "It's amazing how much opportunity there is if you just keep your focus." On a day like today, where we start strong out of the gate and end very close to the day's highs, it looks so easy in retrospect to just buy and hold for a killer day. What isn't apparent is all the counter moves and choppiness between the surges that can knock you off the bull that you're riding.

As any rodeo champ knows, you stay on that bull by moving with it, not by fighting it. Once you lose your center of gravity, you're in the dust, making sure the bull doesn't stomp on you.

So what are your centers of gravity as a trader?

One important one is price levels from trading ranges. There are many relevant levels and ranges during any particular day. Some of the ones that I emphasized in the intraday Twitter posts were the ES 791 overnight high and the ES 802 multiday high.

A useful rule is that, when we break out of a range--particularly on strong volume and volatility, with most sectors participating-- we don't fade that move unless and until we see prices move back into that range. In other words, if a breakout is genuine, we should not return to that prior range.

What that means in practice is that, once we vault above the price level corresponding to the upper edge of a range, we may consolidate and pull back a bit before continuing higher. If your aim is to ride a trending move, you don't view that normal profit taking as a threat. Indeed, it could even be an opportunity to add to a position.

To be sure, there will still be those times when the bull bucks and gyrates, knocking you on your seat. I wouldn't fault a short-term trader for getting out of the way when weakness entered the market near 12:30 PM CT. Still, as the Twitter comment pointed out, we did manage to stay above the key overnight high price level, setting up a second wind for the bull. Knowing where your ranges are helps you identify when you're rangebound, when you're breaking out of ranges in a trend, and when you're re-entering those ranges to reverse a trend.

In short, you don't try to predict the end of a move; you have to wait for the market to tell you it's over. Similarly, you don't lean one way trying to predict which way the rodeo bull will toss and turn; you keep yourself centered, maintain your feel for the movement, stay loose, and react. Everyone gets tossed at times, but it's amazing how, with your focus, you can find quite a bit of opportunity just by staying on that bull a little while longer.

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4 comments:

Curtis said...

One thing that helps me to have confidence in my bias on a big trend day is the TRINQ. I use it as my confidence indicator. If TRINQ is reading well then I will have more confidence in my bias short or long. So, it just gives me more confidence in terms of what will cause my bias to change. But, also, every indicator can fail, so it can cut both ways because I am more likely to play strong when I have a good read.

Matthew C. said...

For today, I faded the first 2 bounces off 800ish and booked some coin. After the third major challenge succeeded I got ready to buy in at 804 but unfortunately had to go to a last-minute meeting at my work. I figured once 800 was decisively breached the market was likely to continue running, and it did.

OV said...

Dr Brett,

This is another post that triggers some comments since I also watched the market the whole day. Things were a bit too fast for me and given the gap up I only did some paper trading.

Suppose you bought the high open in the morning, price level stayed above VWAP for the morning, TICK positive, trin low. All the good signs were there.

Then things started to look like a trend reversal, with TICK increasingly negative.
By the time you waited to see how things turn out to be (will price level dip below VWAP) price level was already below morning buying price.

Waiting for confirmation in a day like yesterday would not have led to whipsaw, as price went back up above buying price in the pm.
But some other days, waiting for confirmation for a trend change would have led to repetitive losses and many of them. Yet the signals were the same (tick, trin, vwap).

We only act as a response to what we see, and these particular indicators are lagging the price action (since they are based on past price/volume).

After the price momentum fades we are at an "inflection point" and there is little to tell in which direction the price will go.... unless we are EOD and our mind finds one of the indicators confirming the past action (e.g. this time was the $ADD, or the TRIN, have you seen the breadth, etc, etc).

At the inflection point, $ADD can change, so can do $TRIN - because they all show what the market did and not what is going to do.

It's only an observation but I believe indicators in very strong trend days should be regarded in relative terms. Strong up moves should be matched by strong down move, for the reversal to happen - with the risk, indeed, of losing the trade.

In retrospective, for someone who did not want to take the risk of buying after the big gap up, I think the less risky entry point was at 2pm and a break of 807 or so (break of morning high).

Many thanks again - fantastic blog site-

OV

IMO TRIN being a ratio of two ratios, personally I am not so convinced is that reliable as a buy/sell indicator. One has to look at both issues and volume to interpret it correctly. But yesterday it was :-)

Matthew C. said...

OV,

Have you considered "scalping" some of the run up? That way you don't have to commit to a position that the upward motion is sustainable but can still benefit from it.

This can create a cushion in your account to give you more mental "safety" for building a core position during a pullback.

I find it is often much easier to figure out where the price is likely to go over the next minute than over the next 3 hours, so I often bag a half point or a point and run. . .