Having conducted hundreds of daily analyses (spreadsheets, not "eyeball analyses"), I can assure you that in a well-defined trend, what we often defined as "chop" is consolidation for the next leg of the trend. Crude oil this morning broke out of nothing like a bat out of hell and then commenced to chop quite badly. When a HOD/LOD is put in way more often than not it will be tested before a trend reversal occurs. And that's exactly what happened. "Think continuation" is what my mentor drilled into my head. Occasionally there's a V bottom or top, but that rarely occurs out of chop.
Been meaning to ask you this, if one wants to catch the 'trend' of the day, or a big swing in a particular direction, what bar interval would you suggest? Getting a good entry makes a significant difference in options spreads, so this is something I'm working on. Swing trading, so the decision to enter is a separate process, but if I want to buy a put vertical for example, catching a daily high would mean a great entry price. Equally, if price is just going to head down, the sooner one enters the better.
I rarely get into a trend at the beginning. I used to have a top picking/bottom picking illness, and in fact it can work in the hands of a very experienced trader with a very specific plan, but I really didn't know what I was doing at that time and I'm very happy to have learned to stay with the trend mostly and trade off extremes in a wide range only. What I've found is that "if price is going to head down" I get plenty of profit from the move without having to get in at the turn. In oil futures today (those who don't trade futures can reference a chart of USO; I think a CL contract is similar to trading 2000 shares USO), price ran up to new highs during the 11:05 ET bar. I have no idea if the move is over. There's higher resistance levels to be tested and it's Friday; heck, price could break 109.00 for all I know. However, by the close of the 11:45 bar, price had broken the uptrend line and closed below it. That's an early reversal signal, but I prefer to see more price action take place before shorting. There's previous resistance at 107.92 (CLU3 contract) and the bulls should defend that. If it breaks without much defense, then I'll look for a short entry. This sort of patience to wait for ideal conditions, conditions where the counter-trend traders will get more aggressive and where the current bulls will start taking more profit off the table, pays off very well. There's no need for me to try to pick the earliest possible turning point. By having my mind in a counter-trend "it's gone too high" mode, I would miss with-trend opportunities, and sometimes the final leg of a strong trend is the best move of all. So in this situation in oil, 107.92 broke down with conviction during the 11:55 bar, and I then watched for a pullback on the 1min chart to short. There was a very nice little bear flag setup and the bottom just fell out after that. If I'd tried shorting earlier, in the nasty chop after the initial breakout, I might've made a real mess of things. I did position long twice after that breakout. I scratched the first attempt when a test of the breakout high failed to materialize, then I positioned long a second time and scratched that one 2 minutes before the breakout to a new high. I committed the cardinal sin of "thinking while trading", LOL.
Folks, I'll be taking a break till after Labor Day, but feel free to keep the ideas going here! Good trading to all!
Thanks for the outstanding thread NoDoji! I have been chopped up on far too many occasions; now I'm starting to understand why.
I don't like to trade during chop, but there were two trades that looked good for a scalp on Friday 8-16-2013. (All times CDT). Keep in mind the context we had going into Friday morning. The Dow dropped about 225 points on Thursday, so I'm expecting a quite trading range on Friday, ie - possible chop. Also, starting around 13:10 on Thurs., the ES was in chop mode. So I'm looking for a carry-over "trading range" into Fri. morning since we opened flat. The chart shows the initial resistance from Thursday around 1659.50-1659.75. I always look for a confluence of events before I take a trade. So here was my setup for the actual short I took on Friday 9:15 CDT. >> Look for quick reversals due to chop >> Price tested resistance twice at 1660 >> Price at channel high resistance >> Two topping tail bars (Joe DiNapoli calls these RailRoad Track Reversals) I also keep an eye on pivot points, since so many traders will react to these points. There were several pivot points (resistance) near 1660 zone. I shorted at 1658.25 and took profits at 1657.25. I wanted a quick exit due to the trading range. Did I mention that I don't like chop? Note that everything I have mentioned here is based on price action. -Al
Knowing that the ES was still in chop on 8-16-2013, this is the second trade I made. It was a long entry on a break above 1658.50 on the 9:30 bar (5 min.). My target was a measured move at 1662.25, but I was watching the 1661.00 zone as possible resistance. When price struggled at 1661.25, I bailed out on the break below the 9:55 bar at 1660.00. Notice that I've highlighted the first 5 min bar (candlestick body). I always watch this for possible S or R. Also, the channel that I've drawn may not be typical... but, I frequently discover useful information when I draw these. Notice that price stopped exactly at the channel low and in the zone of the first 5 min. bar. Here are the confluence of events I was looking at for my entry. >> First 5 min. bar zone support >> Channel low support >> Strong reversal bar >> Reversal bar is an "Outside" bar (I don't see too many on a 5 min chart) As I mentioned, I don't like to get involved in chop... but there were enough confluence of events to get me long here. -Al
DTB2, You're correct about trying to scale. Right now, I'm trading one lots. After I'm convinced that I can consistently trade my setup, then I'll consider increasing the contracts. I'm told that when you get really good at day trading, it becomes boring. I'm not bored yet. -Al
That's a good question. My swing trading analysis is performed after the market closes. And I'm using a few scans now which helps things go faster. So when the market opens, there is not much work to be done with the swing trades. That gives me the freedom to day trade the ES during the regular session and still execute the swing trades. And if I can be methodically and consistently profitable, then it will only add to my annual returns. But I still have a lot to learn about day trading. The bottom line is this... "Money Loves Speed". -Al