Idealized Trades During a Trend Day
Yesterday’s price action exhibited textbook characteristics of a ‘trend day,’ and analyzing the action can help you spot the conditions that lead to a trend day earlier and trade more effectively as a result.
First, let’s discuss what a trend day is and how we might detect it early.
We define a trend day as an occurrence where price opens at one extreme and moves in levels or steady waves to close at the other extreme. Trend days are often marked by higher overall volume.
The initial price movement in the first hour and a half can give you early indications that price will begin at one extreme and move in a reliable wave-like fashion and close at the other extreme.
If the initial 30 minute or one-hour range bar is significantly greater than those of previous days, and volume is notably higher during this period than previous days, then you have your first clues that the remainder of price action could unfold in a ‘trend’ fashion.
If the TICK is extremely one-sided and there is a large reading (or trend) in breadth (Advancers – Decliners) for the day, then those can serve as clues as well that a trend day is more likely.
Also, if the previous day was a “NR-7” or Narrowest Range of the Last Seven Days, or was an inside day (the day’s range was completely inside the previous day’s range), then odds increase for (but do not guarantee) a trend day.
Let’s drill down to the intraday price action of November 28th, 2007 using the DIA as a proxy:
Notice that I have ‘thrown all indicators out the window’ and focused on pure price action. Oscillating indicators such as the RSI, Stochastic, MACD and others tend to fail the most in strongly trending markets due to the fact that there are extreme readings and no true ‘waves’ or oscillations in price.
In a trending environment, it is best to use moving averages only (or perhaps the ADX indicator as a crutch) and trade retracements to key moving averages.
The initial oval I have drawn, and the breakout from the oval on higher volume is your first clue that the day could unfold as a trend day. The only caveat is that the previous day was also a trend day, and the odds decrease when the previous day was a trend day as well.
As price swung out of a weak retracement, price consolidated at Dow 13,200 (understandably so) and formed a rectangle where price pulled back to the 20 period simple moving average (very faint dotted line in chart). Price then broke above $132.00, but it was during the ‘afternoon lunch period’ which typically shows consolidation and low volume.
Around 1:00, price completed a mini-bull flag and retraced comfortably to the rising 20 period EMA, setting up a key trade with very minimal risk. Price then ejected up from that point and later formed a more reliable (truer) bull flag which also pulled back to the rising 20 EMA and then resolved nicely to the upside.
Although price broke the rising 20 into the close, it found support at the rising 50 period, which could have set up a trade into the close.
Early identification of a trend day will allow you to put on a leveraged core position and trade (swing) around it – in this way, you will maximize profitable intraday opportunities.