Today’s Intraday Trading Tactics

Jun 18, 2008: 6:10 PM CST

Today’s price action was in some ways similar to a trend day, but the price action wasn’t as clean as expected.  Let’s look at some of the key trades we could have taken in today’s market price structure.

5-minute chart:  DIA

First, the market began with an overnight gap of less than 100 points in the DIA.  Odds favored a gap fade, but unfortunately the market didn’t fulfill our gap fade wishes, stopping us out for a small loss, but giving us valuable information that the overwhelming bias for the day was to the downside.

If a gap-fade trade gets stopped out, it’s often best to reverse the position to trade in the direction of the gap, with the assumption that the market was so strong in its impulse that it overcame the ‘gap fade traders’ and should be – in this case – heading lower for the day.  You should have established a core position and then ‘scalped’ to the downside as price retraced back to key moving averages.

The red arrow around noon brings up an excellent point.

“Should I place stops at moving averages or just beyond them?”

I always say that if you expect a trend day, establish a core position and then place your stop beyond the 50 period EMA.  The key word is ‘beyond’ because a clean close above this average invalidates the structure of the trend day (with price being beneath both the 20 and 50 EMAs and making consistent lower highs and lower lows).

If your stop was too close, you were stopped out with frustrating results as the market screamed into new lows on the day.  Aggressive traders could have actually established a short trade when price came back under the falling 50.  Notice that price did not notch a 5-minute close beneath the average.

Nevertheless, as price meandered its way lower, setting up another short-sell trade around 2:00 with the hammer candlesticks, a positive momentum divergence formed, which clued you in that odds were decreasing for further downside play.

In fact, I’ve seen many times that intraday price lows form on positive momentum divergences, so aggressive traders could have used this opportunity to ‘bet’ on a price low and traded to the long side into the close.

Price indeed resolved its positive momentum divergence strongly to the upside, snatching away any core trade stops placed above the falling 50 period EMA… before rolling back over to close near its lows.

I must say that it was an absolutely frustrating day to trade this market.  Not every day is perfect and will align to your strategy.  But it’s key to have a strategy, have defined expectations, and to trade with risk managed in the environment price gives you.

I hope today was good to you, but if not, take the time to hand-annotate the charts you traded and see where the ‘idealized trades’ lied for the day so that you can recognize them and act on them faster in real time.

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