Insights from a Difficult Trading Day

Jun 19, 2008: 6:29 PM CST

What do you do when you have a rough day trading the markets? What does a rough day look like?

Today was a rough day for me, as my style of ‘scalping’ momentum trading, which relies heavily on impulse and moving averages, totally fell flat today in the DIA – the market I trade most actively (I trade the Dow-Mini futures, but the DIA often holds better educational lessons and shows up beautifully on StockCharts.com). Let’s see how the action broke down and why it was so difficult:

Let’s see if I can walk you through the day.

First, I begin with an ‘opening bias’ derived from last night’s analysis, meaning I have an expectation of what my first trade will be (will I be a buyer or a seller for my first trade?). I then wait for a subsequent trade to set-up before taking action with limited risk.

Because of my bias to the downside, I decided to be a seller. The opening gap provided an ample opportunity to do so and I picked up quick profits with the large ‘bar’ plunging down to yesterday’s open.

Typically, with a gap fade, you get a reaction back in the direction of the gap, so I tried to play the market back up which worked for all of 10 minutes before reversing, giving me a near break-even profit.

My trouble came at the first red arrow around 10:30. Because of the new momentum low, and because price failed to overcome the 20 and 50 period moving average, I got aggressively short on the red sell candle. Naturally, you can see this strategy didn’t pay, so I took a larger stop (thanks in part to overconfidence and an overly bearish bias).

And naturally, the market plunged back to test new lows on the day after surging above its key moving averages and confusing traders into thinking the market was going higher. While there was a small positive momentum divergence, I still expected lower prices and tried to trade the downside just before noon with the same idea in mind I had earlier – place a stop above the moving averages and play for a test of the prior lows, if not beyond.

You can see as well that this trade failed. With my daily limit hit, I decided to step aside and play the role of “analyst” instead of trader for the rest of the day.  Personally, I trade best in the morning session, so I limit my afternoon trading only to the ‘irresistible’ set-ups or trend day trades.

I don’t do well in rangebound markets, which I’ll classify this day. I also don’t do well on days that violate my expectations, though I tend to do very well on days that conform to my overnight expectations.

In hindsight, which is always 20/20, the ‘ideal trades’ seem perfectly obvious, and I have annotated some of those with purple arrows and rectangles. There were plenty of simple ‘single candle’ entries, such as hammers and shooting stars (and dojis). No matter how my trading day goes, I always annotate an “Ideal Trades of the Day” chart(s) – some of which I share on the open blog if there was a particularly interesting or educational pattern (or trade). I strongly recommend you do the same so as to internalize the patterns you’re trading.

Looking back, it looks simple. “Oh, we’re having a range day today! Let’s fade price any time it pierces an upper or lower Bollinger Band.” That strategy would have worked like clockwork, and often does on a range-bound, indecisive day. Conversely, the strategy gets killed on trend days (which I am more geared and tuned to trading).

We have to trade in real time with the expectations and limitations we’re given. We don’t know what type of day it will be (range, trend, flat, volatile) but we can have expectations and then change them as the structure unfolds, via Market Profile style tactics. You have to understand the types of days to know what strategies (or trade set-ups) have the highest probability of ‘working’ in that given environment of the day.

Also, for motivation’s sake, it’s often the ‘bad’ days (not that today was horrible) that give us the most insight and help us develop even stronger as traders.

Take the time to sit down and annotate your charts and compare your performance with the ideal performance, with the goal being pattern internalization for swifter and more appropriate action for the next trading day and beyond!

2 Comments

2 Responses to “Insights from a Difficult Trading Day”

  1. Scott Says:

    I feel your pain – after my first short sell signal betrayed me I did not make another trade for the day. Instead, I passed the day applying and studying the different trading strategies and frequencies to the YM and ES contracts. Your post is timely as I observed exactly what you stated above regarding the BB volley. Bollinger Band plays work very well on a range bound day offering near peak and trough buy/sell signals. However, once a trend develops this strategy quickly fails.

    Sage advice on establishing an expectation for the day. If you find the market is not meeting your expectation then one has two choices – accurately interpret the price action and adapt your strategy or sit it out to observe and learn.

    Perhaps tomorrow will offer something a bit more interesting.

    Great stuff as always, take care.
    Scott

  2. Sami Says:

    I think it is only after a difficult period of time that we are able to come out to a bright future, so while we all feel the pain yet it is great if we learn from this and thankfully for me broker OctaFX even in my worst time I was able to make decent return thanks to their ever popular cash back service (rebate) it gives us 15 USD per lot size trade and at the same time we can work with comfort.