Assessing Risk
When you start the day with a large gap, it pays to check your longer term charts for reversal levels. In this case the daily chart shows that this morning’s plunge reversed within two ticks of the January 9th pivot bottom.
The daily also shows a nice wedge formation created over the last six weeks. Wedges are supposed to retrace their height quickly — however doing it all on Tuesday was certainly a surprise.
Besides matching the 1/9 low, today’s bottom pivot was also a 162% external retracement of yesterday’s range, giving several reasons to look for a reversal at that level. The question is whether you are willing to step in front of that kind of momentum.
There are several problems with trading this type of volatility. One is the size of the physical bars. Recent ranges have averaged around one point — near today’s open on the 3 minute timeframe it was over three points. This means that if you are using bar highs and lows as basing points, your risk on each trade has increased greatly. Of course so have the moves, as shown by the almost 17 point move in fifteen minutes this morning.
In order for me to find an entry with limited risk I had to look at a 1 minute chart, and even then I decided to pass the trade. Later in the day, when things calmed down, price kept missing potential Fib turning points. After all the nice setups this past week, today just didn’t match my trading style. But as a day trader, there is always tomorrow.
