May 282010

As expected, volume was extremely light and volatility continued to come off in the early session. That said though, some of the moves into key levels were very convicted and you had to have sense enough to get out of the way. As I mentioned pre-market the OL was a little weak and any probe under the day session pivot would probably be the last clue of impending failure. Today brings up an interesting item to touch on. You will note I didn’t have the low volume at 94.25 as a potential trade today. I felt that the pivot and the strong acceptance at 92 basically “framed” the area between as a likely fast market area and as such we wouldn’t get much rejection there. Boy was I wrong. That was “the” textbook trap of the session and a perfect rejection spot. This is why it always helps to have opinions from at least two sources so you don’t miss anything. For any of you that are premium members, you have your own level work, plus mine to check it against/use as a crutch to give confidence you are making the right choices. I just wanted to bring up that NJ, RM, RO, RC, etc. and I do the same thing with each other. There are bound to be times when someone sees something the other doesn’t. In any case, here is the trap set up at the 94 handle…

And here is the Biglot confirmation trade out of my first major interim support area around the 92 handle which I called this morning. A word on trading high volume areas: I don’t normally do it but in this case I felt that the previous high failure test and then the strong support developed yesterday made it a sort of rejection/acceptance combo area worth trading. It was mostly a market structure decision though because I felt with the low volume and decreased volatility that was the obvious place for the first major turn today. Remember what I always say – you get payed off by being right in these markets. period. All the technical analysis in the world can never replace instinct and feel. I don’t know what else to say about it. I had good supporting market structure that indicated potential support, I put the rest of the pieces together, listened to the market internals going into it, the price action and large trader conviction confirmed and it set up perfectly. If you were trading to the next acceptance area or just the first sign of contrary institutional activity, there was some real meat on this one…

Have a great long weekend and we will see you all on Tuesday. Hopefully you have all had a good week. The levels have been lining up very well despite the volatility which proves once again that the auction process and its relationship to volume at price in any market is no theory.

 Posted by at 12:30 pm

  6 Responses to “5/28/2010 Post Trading Analysis”

  1. Hi RG,

    Can yo define what you mean by fast trading area – plus do you draw your levels on your Footprint charts ahead of time that you use for entry

  2. RG
    Thanks for mentioning the 94.25 – I was wondering why that was not mentioned in the key market levels!
    Great and informative market description -as usual..
    Have a great weekend!

  3. No, I don’t draw level on the entry chart. I keep looking at the 30M with volume profiles all day along with internals and congruent markets and only look at footprint when we approach a potential execution area. I do have the YH/YL/YC/OH/OL/VWAP/Pivots on the FP though to use as a guide. I just don’t like to crowd the FPs so I can see them better. NJ does put his levels on his entry chart though.

    A “fast area” is any area where there is a scooped out profile or a wide range of lower volume. The initial reaction to a low volume spot is usually rejection, but if it gets too far over the center line so to speak the usual result is the market moves quickly to the nearest high volume cluster on the other side. Remember, when in a low volume area the market doesn’t “understand itself”. It doesn’t know what those prices mean in terms of value so it wants to find a well known value area to find its footing and then venture out a little at a time to test low volume areas. If you don’t get that initial rejection – or if you do and it shakes it off, you will almost always see the market move very quickly through the remainder of the low volume area until it gets to the next high volume cluster.

  4. Yeah, NJ had the level – forgot to mention that – so we got it of course but it always helps to have some extra cooks in the kitchen. that 94 handle set up really nice.

  5. RG,

    Can you explain the volatility in the market? As somone that writes algo’s is a lot of this fast market down to high speed computers using algo’s to rip price up and down?

  6. Nah, it has nothing to do with high-freak or program trading. That is just a bunch of media hype nonsense. The market is more pure than it ever was. Computers are just like people. They have to be programmed to have an opinion about a binary event. They lose when they are wrong just like people. Actually, the program trading only adds to the strength of S/R levels. There is manipulation in the market and it is rampant sometimes, but it is information driven not computer driven

    Volatility is caused by uncertainty plain and simple. It actually makes fading easier sometimes. As a rule of thumb don’t even worry about volatility beyond how it impacts your risk. If your stops have to be bigger notionally, then you have to trade less contracts to hold the same per trade risk. Level handicapping is the same regardless except that you have to allow for the wider range. The profiles take care of it though. Notice how the edge levels have been running 2 points every day in my ranges on the sheet. Watch when the vol comes off some and you will see those shrink. The market takes care of itself.

    The only danger in these conditions and why we have less trades than usual this month – quite a few no-trade days for us – is when you have hard trending conditions AND high volatility. An easy out for that is to put up a sector quote board of all the main sectors in the cash market. When they are all one color coming into a level and it is volatile you may just want to consider not trading. But if they are mixed that is what you want to see. Then just watch the 10s, Euro and VIX and you will be fine. You don’t want to use that stuff to tell you when to trade. You use it to tell you when your probabilities are less for winning or higher that you will get run over – in other words, you use them for telling when NOT to trade when everything is against you. You just need a little improvement. So if all sectors are selling and the 10s are bidding coming into a level and then after the first push you see the bid easing a hair and then all sectors are mixed now that is probably enough – assuming you liked the level pre-market of course AND the order flow then gives you a set up. You want to get your edge from everything at once – but just a little from each. The biggest mistake most traders make is asking each of their method components to be perfect. They never are and never will be. Order flow is really not much better than even money on its own. You would probably make more by guessing direction using fundamentals even if you sucked at it than you would following order flow blind – seriously…

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