Friday’s action was clearly a ‘trend day down’ in all classic definitions of the concept. How so? And how might you profit if this situation occurs again in the near future?
First, let me give some generalizations for a ‘trend day’
Trend days often begin with an overnight gap
Breadth is extremely skewed on a trend day (from the start)
Volume is often noticeably higher on a trend day
The TICK often reaches extremes and fails to retrace far below (or above) Zero
The shorter (20 period, especially) moving averages serve as barriers for price
Here are some Tips for Trading Trend Days
A large overnight gap is your first clue that we may have a trend day.
Failure to retrace the gap (or even a 50% retracement) is your likely confirmation. At this time, assume that we have a trend day underway.
Next, trade only in the direction of the original gap – do not attempt to ‘fade’ a trend day at any point of the day. Use retracements only as places to ADD TO or establish new positions – never try to profit from retracements against a trend day.
Once you believe we have a trend day (in the major indexes), it is best to establish a ‘core’ trade (even a small position) that you plan to hold until the end (close) of the day. If it is truly a trend day, price will close either at the daily low, or very near it.
Use pullbacks to the 20 period exponential moving average either to add to your core position or put on a large position (perhaps on leverage) and play for a small target with larger size. Your personality and risk-tolerance will determine your exact strategy here.
Unless you have a strategy (or system) that accounts for trend days, it is often best to eliminate all your indicators and follow key moving averages only as entry points and risk management (stop-loss placement). Example: What if you had entered each time the market retested the falling 20 period moving average and placed your stop above the 40 or 50 (shown) period moving average? Do you honestly need additional indicators to help you identify better trade location?
Relax, and do not try to over-think or over-work the day’s action.
Trend days are normally ‘rare’ occurrences, but in this current market environment, they are certainly becoming more frequent.
If you have not done so already, try to make an exception in your strategy (or an addition) to account for, and successfully trade these wonderfully profitable ‘market gifts.’