Showing posts with label how-to-master-intraday-trading. Show all posts
Showing posts with label how-to-master-intraday-trading. Show all posts

MASTERING THE INTRADAY MARKET

MASTERING THE 

INTRADAY MARKET




 
The survivalist trader needs accurate feedback on open positions to take advantage of directional movement and to guard against traps, rinse jobs, and other unwelcome surprises. The best way to accomplish this daunting task is by observing and managing exposure continuously in the intraday markets. While watching every tick isn’t a viable option for many traders, it’s the preferred management route whenever possible. The remote strategies outlined in Part Four offer a useful alternative to folks with real lives away from the financial markets or commitments that keep them from the ticker tape.
In the real world, some positions will behave very well, while others go haywire and fall apart. This duality forces the trader to establish an adaptive profile that denotes the prechosen exposure and risk associated with all open positions. This macro control mechanism needs to match external market conditions which in turn require constant adjustment through position choice, share size, and holding period. The adaptive profile is far more important in a successful market strategy than any individual trade. The financial markets cycle through phases of danger or opportunity. 


It’s the trader’s job to identify the current phase and adapt, in real time if possible, by applying the right collar for that particular market. Collars signal when to let profits run, and when it’s the worst thing you can possibly do. They also define the right stock, futures contract, or currency pair to trade at any point in time. For example, it makes perfect sense to play volatile small caps when the collar is loose and the market is printing money but to stick with blue chips when opportunity is low and predators lurk in every dark shadow.


Adaptive profiling establishes the collar placed on each day’s market activity. This refers to the aggressive or defensive posture based on volatility, sentiment, and current positioning of the index futures. In a nutshell, the survivalist trader needs to be aggressive in times of greatest opportunity and defensive in times of greatest danger. This is one of the more subtle aspects of intraday strategy, because it demands a central theme that changes from day to day. Part Six will address this aspect of position management in greater detail.


GET READY

You’ve reviewed the trade setup a dozen times, calculated reward:risk, and found the perfect moment to enter the market. With a slight adrenaline rush you hit the magic button and open a position. Now what do you do?


First, digest feedback from the fill report. With a market order, your entry might show slippage and demand a recalculation of trade assumptions. So, if you get filled more than a few ticks away from expectations, reconfirm risk tolerance and recalculate the intended exit in case things go wrong. Next, take a second look at the charts to confirm that you made the right choice. We often see things differently when sitting on the sidelines, as opposed to being in the heat of battle with real money at risk. Finally, set a physical stop if that’s part of your trading plan. If not, target the price or specific conditions under which you’ll exit the position without hesitation.




Take your losses manually, whenever possible. This builds discipline because the action accepts responsibility for the trade. It also acknowledges how your stop loss points to an evolving calculation and not a fixed number. Update this mental escape hatch as each price bar modifies your assumptions, goals, and emotional state, getting out immediately when price hits the level where the trade proves to be wrong. The failure swing that demands your exit might turn out to be a whipsaw, but don’t delay action in an effort to find out the truth. A trade can always be reentered after a shakeout, but each position must stand on its own merits. This unbending rule requires a fresh analysis and revised targets for each entry. Keep in mind that subsequent trades often fail because the initial shakeout actually signaled a legitimate change in trend. If a weekend evaluation suggests you’re getting shaken out of good positions too often, then it’s time to revise your stop loss strategy so that trades are given more room to run.


Intraday charts sketch feedback in real time. Watch price action and anticipate how individual bars on 15-minute and 60-minute charts will close. Pay close attention to how buy and sell ticks affect the curvature of surrounding Bollinger Bands and evolving Stochastics. Watch out for thrusting candles that break through the top or bottom band, signaling a momentum peak. Look for small but significant gaps between candles at key price levels. Find the spot where the pattern says the bars should eject into a profit or break down into a loss. Then see if the buy-sell order flow matches your expectations. Measure the market’s pulse through 5-3-3 Stochastics. When a notable surge of buying or selling pressure doesn’t push price firmly in your favor, it may signal hidden supply or demand that will eventually trigger a reversal.


Use position scaling to address changing risk. Take partial profits when trades stretch toward profit targets ahead of schedule. Reduce size when price action gets erratic or external forces make prediction more difficult. Double or triple up when patterns fire on all cylinders or unexpected news lends support to an open position. In other words, trade larger when you’re getting clear signals, and reduce size when forces are in conflict.


Each position has a right size, regardless of account capital. This risk level shifts as price bars add fresh data into the trade feedback loop. Load up during winning streaks and supportive markets because performance implies reduced risk. Lighten up and wait for better times when you’re experiencing drawdowns or reversals of fortune. Inexperienced traders expose themselves to risk because they think total buying power must be committed to each position. These folks will survive a lot longer in the financial markets if and when they just learn to trade well, and stop worrying about making money. In the real world, profits come automatically when we take the time to become proactive managers of our open positions and apply the right collar to each trading day.


TAPE READING

 

You can’t become a successful trader without mastering the fine art of tape reading. That revelation could be a shock after the countless hours you’ve spent studying the charts and probing the indicators. Of course, you can trade without the tape, but you do so at your own risk because the charts paint pretty pictures that trigger perfectly wrong signals. Meanwhile, the flow of buying and selling pressure, as it unfolds on the ticker tape, exposes forces that remain hidden to charting purists. In a nutshell, those impulses uncover the real activities of market players, as opposed to the smoke and mirrors being fed to the trading public. In a word, the tape never lies.


When students ask me for a seminar on tape reading mastery, I usually tell them to sit down, pull up a notepad, and watch the numbers wiggle around for a few decades. They think I’m kidding, but I’m not. Literally, it can take 10 years or more of staring at the shifting numbers to decipher the games played by Wall Street and other market participants. However, it’s worth the considerable effort because, once you’ve learned to read the tape, you have a lifetime edge over less observant traders.


Here’s a tape trick to get a read on the crowd’s excitement level. Place a 30- or 60-day moving average of volume next to the real-time daily volume on your watch lists. The few issues that pace above their moving averages signal impending range expansion for that session. This side- by-side analysis works best when macro influences aren’t moving the broader tape. For example, a stock trades over 50% of its 60-day average volume in the first hour of the trading day although it’s stuck in a narrow range. You’re staring at an actionable signal that could yield a major rally or selloff by the closing bell.


Veteran trader Larry Pesavento points out a powerful tape reading tool called the “opening price principle.” Through years of observation, he discovered how the opening tick frequently serves as a pivot through an entire session. This comes into play in many ways but is most useful when price returns to retest the opening level, from above or below. To use this tool, draw a trendline across the opening prices on the S&P 500 and Nasdaq-100 index futures or their related funds. When price action retraces back to those levels during the intraday session, watch closely for a breakout, breakdown, or reversal, using those swings as trading signals for individual equities.






the opening price comes into play five sessions in a row on the Nasdaq-100 Trust (previously the Power shares QQQ Trust). Price tightens into narrow range (1) for nearly two hours on the first day, with the opening price marking the center pivot of a triangle that breaks to the downside in a steady selloff. The fund gaps down (2) on the second day, selling off into the lunch hour and then bouncing higher. The recovery stalls just a few cents from the opening price, which now marks resistance, and drops like a rock in the close. Price opens marginally lower (3) in the third session and zooms higher in a trend day that never retests the opening level. Whipsaws (4) hit the market on the fourth day, with upswings reversing at the opening price twice during the volatile session. The last day yields another downtrend (5) as selling pressure slams the market right at the opening bell. Note how the opening price comes within eight cents of marking the daily high.


Tape readers pay close attention to the relationship of current price to the daily range. Real-time quotes refer to this ratio as the “% in range.” This simple number can track the progress of a huge basket of financial instruments in just a few seconds. For example, there’s an hour to go and the market is down. Most of your watch list is scraping the bottom third of the daily range, but one or two stocks are popping near 100% on the % range quote. These leadership issues are breaking to new highs while the rest of the list is doing nosedives with the broad market. Guess what? You’ve just uncovered a bullish divergence for momentum plays into the close or an overnight hold, in anticipation of a morning reversal.


A simple display that shows only the last price traded and the bid-ask spread provides most of the data needed to read the ticker tape. The time and sales screen is helpful but not essential to your task, and I’d avoid the Level II screen entirely because it’s just a distraction. There’s a misconception that tape reading and technical analysis are separate but equal paths to market mastery. In truth, the effectiveness of your tape observations comes from identifying critical chart levels where buyers and sellers clash, with one side or the other finally taking control. When you uncover one of these contested levels, sit back and watch as the battle unfolds, understanding it might rage for hours or end in a few minutes.


Look for a defense of the boundary and if there’s enough excitement to overcome it. Decide whether the bulls or bears seem more determined and in control of the tape. What doesn’t happen during these conflicts is just as important as what does happen. For example, price lifts into a key resistance level, where sellers should be attacking the bid and attempting to trigger a reversal. Minutes pass, but no selling pressure emerges. This lack of activity yields a bullish divergence, telling the tape reader that bears have stepped aside for whatever reason, allowing bulls to trigger a breakout and much higher prices.


The most basic order flow manipulates price against crowd emotions. Simply stated, the ticker tape knows the chart better than you do. In a typical scenario, professionals and their program algorithms keep one eye on stocks and the other on cross-market forces. They push prices into and through support-resistance levels to test the waters and see how much volume is generated by their activity. Feedback loops then come into play, with a notable reversal when a specific level can’t be broken and a directional “pile-on” momentum when greed or fear triggers a breakout or breakdown.


Filter the ticker tape’s message through the most popular intraday technical tools. For example, the following extremes points to trend days in which the tape reader needs to avoid swing reversal strategies because support and resistance levels are unlikely to hold.

• NYSE TICK probing greater than 1,000 or less than –1,000 repeatedly

• Advance/decline greater than 1,500 or less than –1,500 on both exchanges

• Advance/decline greater than 2,000 or less than –2,000 on one exchange

• Up/down volume in both exchanges greater than 4:1 or less than 1:4

• S&P 500 and Nasdaq-100 index futures up or down more than 2%



No two issues trade alike on the tape, so it’s wise to observe ticker movement and check out certain risk characteristics before taking a position. Look for depth of participation and which players are spending the most time at the inside bid-ask. Measure volatility by comparing current price action against the width of a typical swing in a quiet market. Share size on the market depth screen is a total lie, due to rules that permit hidden orders, but the flow of buying and selling pressure might tell the truth, so average out total shares on one side of the market for several minutes and compare that number to relative price movement. This simple exercise could expose a few big whales swimming under the surface.


A QUICK CHECKLIST IN TAPE READING

 


1. Memorize key levels on your favorite charts. Then watch the tape whenever price approaches one of them. See if you can predict reversals before the crowd does.


2.  Look for divergences between sentiment and the tape flow. Are hidden buyers holding up prices in the middle of a selloff, or do rallies fizzle out for no apparent reason?


3. Ask if price action matches your expectations. Look for buyers at breakout levels and sellers at breakdown levels. When they don’t show up, stand aside or fade the trend.


4. Use the opening price principle. Draw a line across the opening tick on the S&P 500 and Nasdaq-100 using breakouts, breakdowns, and reversals as trading signals.


5. Track the relationship between price and the daily range. An instrument holding high in its daily range has hidden strength, while one hanging low has hidden weakness.


6. Follow professionals in quiet times and the public in wild times. Insiders chase volume during periods of conflict but lose control of the tape when the public enters the market.


7. Liquid stocks move in channeled ranges. Ignore oscillations in the middle of these zones, but focus undivided attention when prices reach upper or lower boundaries.


8. Most volume comes from scalping machines pushing prices around for a few pennies. Find the whales underneath these minnows to predict the next rally or selloff.


TAPE TRADING TELLS

Experienced tape readers keep a collection of key observations tucked away in their brains so they can act quickly whenever the tape cycles into analogous price action. This hodgepodge of personal signals, setups, and key tells can yield quick profits because the data come through personal experience instead of from reading a book or attending a seminar. Mr. Market plays a constant game of misdirection, but our accumulated tape knowledge lets us see through the veil and decipher key elements of the daily grind. Let’s look at the most potent of these small portents of market direction:


GLOBAL FUTURES

 


Look at premarket index futures and see where they’re trading relative to their day-session 15-minute 50-period moving averages. Expect a positive opening for stocks when index price sits on top of the average and a negative opening when it lies below. If the S&P 500 is above but the Nasdaq-100 is below, look for intraday rotation from tech and small caps, into the blue chips. Flip over this outlook when Nasdaq-100 is above and S&P 500 is below. On those days in particular, watch for speculative four letter stocks to take over the leadership mantle.


ADVANCERS/DECLINERS

 


Market breadth and up/down volume offer valuable data on hidden strength or weakness. Buy midday pullbacks when breadth shows greater than 1,000 advancing to declining issues. Sell midday bounces when breadth shows less than –1,000 advancing to declining issues. Up to down volume in both exchanges greater than 4:1 points to a trend day that favors the dominating side of the market. Assume there will be no intraday turnarounds when you see this type of price action. Instead, stop fighting the tape and focus intraday capital on 60-minute range breakouts or breakdowns that follow the prevailing trend.


BUY/SELL FLOW 

 

The NYSE TICK exposes the peaks and valleys of intraday swing cycles. Look for large-scale reversals after  the TICK hits an extreme reading, like plus or minus 1,400, for the third time in a single session. Use smaller TICK extremes to
pinpoint intraday swings that will carry price the other way in a 60- to 90-minute cycle.

 STEALTH BREAKOUTS

 

Watch for a breakout or breakdown when intraday price creeps toward a support or resistance level that it’s failed to exceed multiple times in the last three to five sessions. This slow crawl will print a series of small bars with no pullbacks on the 15-minute chart. Look for these issues to hit the contested level and then expand quickly through the barrier.Why does this type of price action predict a big rally or selloff? It’s a common scenario in which big players have entered the market and are accumulating or dumping shares under the radar, trying not to attract attention. They push prices slowly by hitting the spread with small shares at regular intervals while supporting their positions with decent size on the other side of the market. Momentum eventually gathers steam, and the stock cuts through support or resistance like butter.


 HISTORIC PRICE LEVELS



Stocks respond to every high or low on the chart, no matter how old or far away. Take profits and cut losses into big prints from prior years because they can easily stop a strong trend dead in its tracks. However, be patient because price often goes vertical into these magic numbers, yielding windfall gains. Highs and lows set into place five or ten years ago become excellent pivot points for new entries as well.


ALGORITHM GAMES


Stalk liquid stocks you want to buy on the pullback. Then watch as program algorithms take price down and down and down. Sit back and wait for the selloff to cut through short-term support. That happens because the eggheads writing
these programs know the charts better than many traders and want to shake out poorly placed stops. Finally, wait for the bottom to drop out, and then look for the bid to stretch 20, 30, or 40 cents below the last print while the ask hardly moves. This predicts the selling frenzy is nearly over, and positions can be taken for a rebound. You now have to hit the asking price, even though it’s much higher than the low printed by the falling bid.

Finally, here’s an observation that will add considerable power to your tape reading expertise. Look for price action to cycle through three distinct phases when it moves into a key position just above resistance or just below support. Like so many elements of market dynamics, these interrelated impulses track the action-reaction-resolution cycle.


1. Euphoria driven by the breakout or breakdown

2. Fear triggered by a fade against the breakout or breakdown

3. intensified euphoria or fear that confirms the breakout, breakdown, or pattern failure


Most traders focus their full attention on the excitement of the breakout or breakdown, jumping in when the ticker tape bursts with buying or selling activity. Of course, as I’ve argued throughout this text, this is a great way to lose money. In contrast, tape readers step back and examine the quality of this three-pronged conflict, which ultimately tells them whether the embryonic move is bona fide—or just a nasty trap waiting to be sprung.


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