MARKET PERSONALITY- different market conditions
Thanks to Bobh from the Nqoos Yahoo group for this great
post showing the value of cultivating the sense to determine Market
Personality in order to maximize your profitability...NQoos
OK, here goes. I picked a day on bonds
about a week or so ago because it's an excellent example of the different
types of markets I tried to describe earlier - and also the transition from
one type to another and why we need to be able to adapt. There are 4
charts attached and I'm going to walk you through how we traded them (or
didn't) and why.
First I want to make a general comment though.
Over the years I've gotten pretty good at avoiding bad markets and very good
at capitalizing on good ones. But it wasn't that long ago when I was
absolutely great at getting chopped up in bad markets and then missing
most/all of the move that ensued when it finally broke out of the congestion
(usually because I lost the will to trade after getting chopped up).
Point being - this is something that ANYONE can learn how to do because
there's nothing special about me or anything that I'm doing.
you can see bonds had a Very lackluster start to this day as they did
nothing but churn for almost 4 hours after the Open. This is unusual
for bonds/notes but it happens. However, for those of you who
watch the ES primarily or exclusively, this chart should look intimately
familiar because it's normally all the indexes do on any given day.
For me this market environment falls
into the "Time to play poker" category (it's a close call though) because
trading inside ranges is not part of my game plan. And while I
understand how to trade this kind of stuff it's more important to me to
maintain my discipline and avoid it versus trying to scalp a few ticks.
Having said all that, this can be a very profitable type of market for
those who like to trade ranges. And if I were to trade it my
game plan would be to look for sells near the top/buys near the bottom,
I'd trade smaller size, and I would look to close the entire position
somewhere near the other end of the range or at a predetermined profit
objective. It's not a market to get greedy in because any
gains you manage to get can very abruptly turn into a loss.
click chart to enlarge
where things "could" start to get very interesting because after
4 hours of ping pong the market finally poked its head above
the top of the range. This is going to resolve one of two ways
now - either it's a head fake and we'll drop right back into the muck
(and probably through the bottom of the range), or something has
just changed dramatically and a good up move is about to follow.
Obviously this breakout was real or
there wouldn't be a story. And it actually setup nicely so you
could be long already, but let's assume we're still flat. In my
early days my thinking would have been that I already missed the move
and would be very unsure of what to do next (besides use bad language).
But that couldn't be more wrong and what to look for next is really
quite simple (as is everything in trading). If you miss the move
out of congestion, which is very easy to do, then you just wait to see
if they can consolidate the breakout. In this case (and it varies
a little depending on the congestion pattern) that means can the bulls
hold the top of the range as support. If they can then the bears
are going to tuck their tails between their legs and go into full
retreat mode and we are going to get a very nice move - and a great
place to enter. click chart to enlarge
which clearly shows them holding the top of the range as support and
providing a great entry. Now it's party time for the bulls and we
should finally have a market...so what should our strategy be in
regards to trade management? Well, we've just spent 4 hours doing
nothing which I view as storing up energy for a big move. We've
consolidated the breakout and are poised to make a big run, so the best
course to me in this situation is to get very aggressive....larger size,
trailing stops, take partials and look to add them back....and do this
until the market tells you to stop. click chart
4 - What can you say
about other than it's great when a plan comes together because it
doesn't happen often enough. The trade worked great and regardless
of what method you used to trail a stop it should have kept you in the
entire move. And there was a chance for an add-on or two if
you didn't think it was too high to buy. click
chart to enlarge
A few points in closing.
First, I haven't talked about any
changes in methods, they never change - only changes in how to use
the market environment to help determine how to manage a trade.
Second, you don't need squiggliest or
other toys to make these decisions - PRICE tells you everything you need to
Third, and as I mentioned previously,
if you want to trade intraday then you have to put in the screen time to
develop the ability to recognize the different environments that the markets
throw at us. Fourth, once you get proficient at that you can then
save your emotional capital for those times when the market really wants to
And finally, this is a fairly typical day and
you can clearly see how a one-size-fits-all approach is not the best strategy.
If you tried to "trade" or be aggressive the entire day then you
would likely have gotten chopped up during the 4 hour range but did well on
the breakout/trend (if you took the trades). If you tried to scalp
the entire day then you would have done OK inside the range but only have
gotten a small piece or two of the big move best case - worst case you
could have gotten chopped up trying to sell it if you didn't "see"
the transition. And then at the end of the day you would be
questioning your "methodology" because neither approach worked
well if at all.
Hope this post proves useful for some of
you. This is really not a methodology issue but one of how/when to apply