Trading What I See

Yesterday had a small range, and today was an inside day (if you’ll excuse that two tick excursion at the close.) It was the narrowest day in the last 20. Looks like holiday trading has arrived. I set alerts to tell me when we got a breakout and they never went off. So instead, lets talk about reversal trading inside of ranges.

Just after the open we moved up to test a pivot high from yesterday, and missed it by a tick. We came back up and re-tested the same level forty minutes later, and this time went a fraction higher. Then we dropped to the Triple Crown bottom (see yesterday’s post), but lacked two ticks of reaching it. These are obvious tests of previous price levels, and I have them marked as Tests of Top and Bottom.

But when enough traders are trying to catch these reversals, their anticipation will sometimes prevent a true matching top or bottom from being made. Then you must make a decision on how close is close enough. If you get in too soon, you will have an excessively wide stop. And if you wait too long, you’ll miss the trade entirely.

Since volatility changes with market conditions, I like as many decisions as possible to be based on what price has been doing in the recent past — recent as in the last few moves I can see on my screen. So my definition of a Test is when the present bar goes anywhere into the range of the bar being “tested.” In the case of this morning’s bottom, I’ve drawn in the range of the Triple Crown’s lowest bar, with the high as a thin yellow line.

Sometimes I’ll fudge a bit, but this general rule keeps me from indecision when I should be taking action. As soon as price reaches the range of the previous pivot (assuming I’ve decided I like the trade) I’m looking for my entry instead of wondering whether we are “close enough.”

And speaking of the Triple Crown setup, the trade is still in play. Remember I pointed it out on a 15 minute chart. Derrik’s rules for this trade would have placed the original stop under the pivot as he took the entry on the next 15 minute bar. And he doesn’t move the stop until reaching his first target, which in this case is 796.90.

With the normal upward bias over the Thanksgiving period, another two points doesn’t seem unreasonable. Then he would trail a stop on half the position under the most recent pivot, with the rest protected at the entry level. For this trade he is obviously looking for a good sized move.