Trading Today’s Trend Day Down

Jun 11, 2008: 9:43 PM CST

As I indicated earlier this morning, due to the double-doji pattern, odds favored price expansion today, with the bias being to the downside.  How could you have turned that bias into profits and traded the trend day?

Let’s take the S&P 500 as a proxy (you would use the SPY or the DIA … or perhaps the futures for trade execution):

The main point of a trend day is to “get the trade on early” and play for a larger target than normal.  Because the bias was to expect a trend day, you should have been looking for early entry.  During a true trend day, price opens at one extreme and closes at the other, so theoretically, any trade execution should yield a profit if held until the close.  I like to manage intraday positions more aggressively (or conservatively, depending on your definition).

Nevertheless, a core trade is established when you feel the weight of the evidence is sufficient to establish the day as a trend day.  I exit core trades when the price breaches the falling 50 day moving average on the 5-minute chart, or at the close of the day.

In this case, the core exit was taken around 2:30, which wound up being nothing more than a ‘shake-out’ trade.  The positive momentum divergence that formed for the duration of the day led me to believe that buyers may be stepping in intraday.  This was not the case, but having the market close lower didn’t bother me because my rules dictate entry and exit.

There were a few key opportunities to ‘scalp’ the price, or play for smaller targets with limited losses, being when price retraced back to its falling 20 period moving average.  The stop goes above the falling 50 with the target being the most recent swing low.  The market gave us at least three of these opportunities today. These give an opportunity to use limited leverage to play for a relatively high probability small target.

The positive momentum divergence built, but alas it turned out to be a false signal, as traders rushed for the exit into the close, unwilling to hold positions overnight.

Trading a trend day successfully can add quick profits with minimal effort to your trading account.

5 Comments

5 Responses to “Trading Today’s Trend Day Down”

  1. jkw Says:

    I don’t think it is very accurate to call this a trend day. Prices moved lower for the first hour of trading, but were then basically rangebound until the last bit of trading.

    In a trend day, prices are actually moving in the same direction for most of the day. The market remains overbought or oversold essentially all day. Mean reversion strategies lose money and momentum strategies make money.

  2. Ed Says:

    Great post, Corey! I saw the IDNR4 on the NQ and decided to play the ORB. A decent core trend day trade. Thanks for your posts, keep up the great work on the blog. I really appreciate your daily breakdown of previous day’s intraday charts. I like to comapre it to my own annotated charts. It’s a great exercise. Thanks again!

  3. Corey Rosenbloom Says:

    JKW,

    I’m actually with you in that this is not a true classification of a pure ‘trend day.’ Case in point, I was stopped out of my core position when price breached the 5-minute 50 period EMA. That is a standard and reasonable exit point for a trend day – the stop is placed there because price should not – by definition – go there. Also, the lengthy positive momentum divergence that developed decreased the odds that a true trend day was developing. I admit I was frustrated to be stopped out and then have price surge back down to complete the day, but we trade what we’re given at the time. Hindsight is great.

    I guess this would be the opposite of a “double distribution’ trend day in Market Profile Theory. It was actually trend down, consolidate (form profile), then trend down. Value was established towards the middle part of the day and then broken to the downside. It falls outside normal classification schemas.

    Excellent observation.

  4. Corey Rosenbloom Says:

    Ed,

    Thank you for your comment and support!

    Odds definiately seemed to favor some sort of price expansion move today, due to the build-up of consolidation and indecision of the last two sessions. I didn’t even realize it was an N4 day – the dojis leaped off the charts.

    I strongly recommend printing off intraday charts of the stocks/futures traded and then making hand annotations of the ideal trades that you identified in hindsight. In doing so, you practice proper pattern recognition so that you can be accustomed to recognizing these patterns in real time. Then it’s just a matter of confidence in trading them. We all see patterns and trade set-ups differently, but what’s important is that we internalize our perceptions to be able to recognize them in real time.

    I’m glad to hear I can be of help.

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