Friday’s action in the US Indexes represented a typical “Trend Day Down,” which provides opportunities for excellent profits with minimal risk.
How do we trade trend days?
Let’s look at the DIA (Dow Jones ETF) as a proxy to see some opportunities:
First, I must say that this was not a ‘classic’ trend day because it did not begin with an opening (downside) gap. Most trend days begin with some form of impulse.
In “Market Profile” terms, this would be more akin to a “Double Distribution” Trend day where there was an initial balance that was broken in favor of an afternoon trend.
Notice the triangle consolidation pattern that formed into the 1:00pm time. Also, notice major support around the $123 (Dow 12,300) area, which held the bottom of the developing triangles.
Descending triangles (such as the one drawn in blue) often break to the downside, and that should have been the initial thesis upon which you operated until proven otherwise… in other words, be expecting a potential downside break.
Once the triangle broke at 1:00pm, this could have been your initial entry, but I prefer to wait for a ‘throwback’ swing (or rally) to add confirmation to the pattern and try to play for better position with minimal slippage (and better stop-loss placement).
The “throwback” came at 1:30 when price again retested $123, and this set up the most powerful trade of the day. You would have been justified in putting on a position and playing for a larger target based on the structure. The initial target (of the triangle) projected price near $122.40 (target shown in dotted black line). The overall trend structure caused price to trade beyond this zone to achieve a lower-low and actually close on the lows for the day.
Each of the subsequent red arrows shows a proper “short entry” with minimal risk trade you could have taken with leverage if you were aggressive and played for a new swing low to occur. You could have easily exited at the target, sidestepped the pullback (rally) and then entered short again… this would have been a very aggressive strategy.
Nevertheless, once you identify a trend day developing, throw away all your oscillating indicators and simply use moving averages to simplify trade entry and risk management. Notice how the trades are set-up via the resistance provided by the declining 20 period moving average only.
Early identification of a trend day can lead to significant profits if traded aggressively within the structure the market gives you.