Gotta Watch the Finger: Intraday Traders Endure Finger Trade May 11

May 11, 2010: 1:53 PM CST

Ahh the finger trade.  One of most traders’ least favorite outcomes and set-ups in the trading environment.

What’s the finger?  Read on and let’s see how the market “gave traders the finger” this afternoon.

First, recall from the morning post that I advocated watching for divergences and short-sale entries as price tested the 50d EMA at the 1,167 level.  That sell set-up occurred, triggered for aggressive traders, then smacked them with a ‘rinse/wash’ finger prior to a “gotcha!” sell-off.

Now, let’s see it:


(Click for full-size chart)

Instead of discussing the whole day, let’s focus specifically on the short-sale trade set-up that formed as we tested the 1,167 level.

Divergences in TICK (internal) and momentum (3/10 Oscillator) indicate that odds favor a reversal in price over a continuation, and as price ‘bumps up’ against a daily chart resistance level, we often get a trade set-up that is triggered with the break of a lower timeframe moving average, trendline, or reversal candle.

Aggressive traders want to get short as soon as possible (in a futures contract, SPY, leveraged inverse fund, leading stock, or perhaps an option), which may have happened as the index started to fall from 1,168 just before noon CST.

If so, they would have bet on a reversal at resistance and perhaps put a stop a few points above 1,170 (just to be safe).  If so, they were ok – no harm, no foul.

However, if they put their stop too close – anywhere under 1,170 – then they got taken out at the (so far) absolute high of the day.  Argh!

To make matters worse, price then collapsed exactly as expected but AFTER spiking in what we call a “Rinse/Wash” or “Finger” set-up.

That means price gives clear signals that it is likely to reverse, gives a clean (perhaps too obvious) entry short signal, triggers the trade, and then smacks those traders who just got short by rallying to a new high, forcing the ‘weak hands’ and tight stop placers to cover in frustration.

And then the market falls… without them on board.

So their idea and analysis was 100% correct but they lost money – it happens.

Solutions?

  • Don’t short on a rally day unless price breaks under the 20 EMA on the 5-min chart; wait for confirmation.
  • Use wider stops on a “That’s too obvious” set-up (like this)
  • Jump right back in (re-short) if you get stopped out and then price reverses to break under where you entered (takes guts).

Don’t get mad and emotional – trading is all a game of probabilities, never certainties.

You can’t predict when a ‘finger’ will happen, but if it does, it can often lead to a big move as expected… but only with those with strong trading stomachs on board.

Finger Trades are also called “Bull” or “Bear Traps,” which is probably the term you’re most familiar with.  The logic is the same… except ‘finger’ is such a more colorful word.

These are the kind of lessons I discuss and highlight to members each day in my Daily Summary Reports in the educational section, teaching these concepts with events/set-ups that happened that day – warts and all.

Members have access to all archived reports to learn all about different types of day structures, concepts, set-ups, and outcomes.

Though repeatedly seeing these set-ups, you become a more empowered trader – it’s the “Teach a Man to Fish” concept (instead of merely handing him a fish one day).

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

6 Comments

6 Responses to “Gotta Watch the Finger: Intraday Traders Endure Finger Trade May 11”

  1. terlyn Says:

    You have to have guts with these big price swings, even if your analysis is correct.

  2. Corey Rosenbloom, CMT Says:

    Absolutely true! High volatility in general should result in wider stops, wider targets, and smaller position sizes. And confidence in your set-up!

  3. terlyn Says:

    I was sure about the setup, but the MACD showed divergences as well against being short during the reversal. Also, not sure if reversal will be 100%.

  4. terlyn Says:

    Trying to count the waves.

  5. midasportugal Says:

    Tomorrow we will have dinner in hell…

    http://midasfinancialmarkets.blogspot.com/2010/

  6. Crude Oil at the $70 Level Gives a Finger... Trade | Afraid to Trade.com Blog Says:

    […] Crude Oil at the $70 Level Gives a Finger… Trade May 18, 2010: 10:02 AM CST I posted yesterday about the importance of the $70.00 level as a “Line in the Sand” Support area for Crude Oil.  Yesterday, price tested and – so far – held that level, developing a triple-swing positive momentum divergence along with a classic “Finger” Trade set-up/resolution. […]