Yet Another Trend Day in the Market – Trading Tactics

Surprisingly (at least to me), the market gave us yet another trend day, though – again – it was not your classic trend day.  Let’s continue to study each trend day occurrence for clues about how to trade them for maximum profit.

DIA 5-minute chart:

Typically, trend days follow range-bound, consolidation days – this was not the case.  Typically, trend days begin with a large volatility gap – this also was not the case.

Price did begin the day rather standardly before launching into a momentum move up, making new momentum highs and creating a bullish cross in the 20 and 50 period moving averages.  Still, while odds increased for a trend day, one still could not classify the structure as such at this point.

With a new price and momentum high, one should be looking to buy the first retracement to the key 20 period EMA, which occurred just before noon.  Price almost immediately satisfied those ‘retracement’ trades but then paused, creating yet another pullback to the key moving average, and setting up a potential new entry.

Here’s where things got sticky for the day.

I always advocate – with my students and in my personal trading – that once you suspect a trend day is unfolding, place a core trade immediately and place your stop beneath the 50 period EMA.  Also, any ‘scalp’ or swing trades should often place a stop beneath this key average as well (such as the impulse buy trade mentioned earlier).

What happened?  A classic “Rinse and Run” or – as I affectionately call them – “F-You” trades (which stands of course for “Fade You” or “Flush You [out]” – or just “Rinse”) occurred, snatching away your long position, taking your well-placed stop-loss with you.  That’s ok – you need to trade with stops.  The hard part about these occurrences is realizing that you made the right move – it’s not necessarily about making the most money or not getting stopped out – it’s about applying consistent metrics and techniques with edge as you understand it, and letting the edge (strategy) play out over dozens and hundreds of trades.

This time, a well-placed trade and well-placed stop was hit… and price skyrocketed higher without you on board.  I try to make it a practice to re-enter following these patterns, because many traders are upset and will likely begin chasing the market higher.  Also, many large volatility moves are preceded by those unpredictable, nasty “Rinse” situations.

Enough about that – price did launch higher, and at this time you should have all the confidence you need to believe the rest of the day should unfold as a trend day.  Lo and behold, the price – after the momentum move – formed a downdraft against you, even forming a mini-bear flag (if you were quick enough to play it – I was not) and found support at the 200 period SMA.

The final move was a strong, uninterrupted push (swing) into the close, which completed the ‘trend day’ structure.  Remember, if it truly will be a trend day, price will open at or near the lows and then close at or near the highs – thus any trade entered in the direction of the trend will be profitable into the close regardless of initial location (provided you don’t try to enter at the end of the day).

Oh, one final note – during trend days, it’s best to focus on moving average for support and resistance, and not be concerned with oscillators such as the RSI, stochastics, or even standard/modified MACD indicators.

Study each trend day and annotate it such that you understand it (utilizing the TICK, TRIN, Breadth, etc) so you can be more profitable when the next opportunity arises.