Finding the Best Trading Opportunities

Posted in: Advanced Trading Strategies, Day Trading, Trading Article

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(and How You Run Your Race)

The markets provide an endless stream of possibilities for taking a trade. On one hand, this is great. But on the other, it means that impatience can sometimes get the better of us. So it’s always good when markets remind us that it’s not always the best tactic to hammer away at them irrespective of what’s going on – having patience and finding the best trading opportunities will help to give you a fighting chance of success.

Instant Gratification

The modern world is all about what you can get now, and I feel that this sometimes seeps into a trader’s behavior.

Most markets are doing something, most of the time. Because of this, there’s usually enough movement to suck traders in, if they’re not wise to it. But not all market movement is good movement. More precisely, not all market movement is good movement for all traders.

Take too many trades when conditions are less than ideal and you may find that when conditions do improve, it’s impossible to fully make up for earlier losses.

In reality, movement is just movement. What a market does is generally not good or bad, so it has to be about how a trader interprets and reacts to the information the market gives them.

“Not all market movement is good movement for all traders”

The problem with reacting to just any old swing in a market, is that it does not necessarily give you enough information to tell you that the odds of a successful trade are favorable.

Contextual Boulders

Contextual bouldersThe key to this is really all about context. Context, for those who are unfamiliar with precisely what I am talking about, is about what the market does relative to what is has already done. This means we have to have some way of standardizing what it is that we look at to get a better understanding of key elements to the auction.

There’s going to be a timeframe sweet spot to find these key contextual elements in for traders of different time horizons. The average day trader for example, would do well to assess their markets on a 15min, 60min and a daily periodicity.

For the key elements or contextual boulders themselves, at base level, we can take things like the high and low of the prior session or the high and low of the recent range.

How a market reacts to these can say a lot about what it’s trying to do.

It may for example, open in the middle of the prior session’s range, take out the prior day’s high by a few ticks and then promptly reverse. This is boulder. This might tell you that a thorough auction higher beyond the most recent point of reference (i.e. yesterday’s high) has failed to bring in additional buying. This could be a cue to go short or look for an appropriate exit for any long position.

There are of course other boulders. The open is one. A gap is another. A gap at the open is indeed another.

Is the EU Session Worth Getting Up For?

To those who are unsure of whether or not the EU session is worth getting up for, the FTSE keeps proving it most certainly is (not to mention the DAX and now the Mini DAX too).

The kinds of contextual boulders we often get in the EU session are, for a clued-up trader, incredibly good opportunities. Of course there are, as you’ll see in the example, poor trades that you need to sidestep. But this becomes far easier if you’re in sync with the market context.

The crucial element is that you don’t need to always be trading every single opportunity.

One of the things that I found out early on in my career is that some good early session wins are all too easily wiped out by many small niggly losses. When things reverse later on in a session and you make some more profits, you often find that after costs, you are either below your peak profit for the day or at a similar level after roundtrips.

In those early days, had I waited for better trades to show up again after putting some green on the board, I’d have had many more superb trading sessions instead of what turned out to be pretty decent ones.

China Turmoil and FTSE Gap Lower

If technical context is caused by an obvious event, it’s often simpler to read. China’s implementation of circuit breakers and them being hit again caused some concern – as a consequence, the FTSE gapped lower on Thursday’s open.

Finding the Best Trading Opportunities - FTSE Context Gapping Lower

As you can see, there was a considerable gap lower. This often leads to one of two things. The first is that a market trades into the gap zone and closes the gap (or at least a good amount of it). This can happen at the open or later on in the session or even on another day entirely. The second is that it can continue to auction in the same direction as the gap.

In one scenario it’s negating whatever caused the gap lower, in the other it’s confirming it.

The key idea however, is that it needs to test at least one side before deciding which direction it would like to go. This is what happened in the FTSE on Thursday.

FTSE Trading Dissected

What we got after the initial opening swing was a test higher.

Finding the Best Trading Opportunities - FTSE Trade Breakdown

Note the initial test higher was good for the first long opportunity, trade #1. Often you’ll get more volatility when a large gap open is created by news and so you can get something out of these early tests even if they don’t precipitate bigger moves.

It’s also important to be wary of the increased volatility in terms of stops – if you’re not careful, you could find yourself getting direction right much of the time and equally getting many losing trades.

Trade #2 was the one and only trade in this series, that I can see no reason to not have taken and it ended up a loser.

Trade #3-10 were all trades which could have been taken, but there was no need to given the context caused by the Chinese gap. Trade #3, 4, 6, 7 & 9 were all shorts above and into the opening price – this made no sense. Trade #5, 8 & 10 were suspect to me because of the reaction at trade #2 and the fact that there was no need to push it – as I saw it, any long trade would be better taken above the current high at that point.

After trade #9 and certainly trade #10, it was apparent that the FTSE was building energy in a triangle-like pattern. A break higher or lower and then an extension of the day’s range in the direction of the break, seemed highly likely to bring in a directional move.

Trade #11 at the time I felt might have been a little aggressive, but it would have been okay to run with, especially if you have some risk flexibility with reducing your trade size.

Trade #12 was a great opportunity apart from its smaller size – even with going to target #3, the adjustment of the stop above the earlier low of the session (5884.0) made the trade a little lop-sided, but it was still worth taking given the circumstances.

Trade #13 was highly questionable for the very same reasons that the short was a good one. It also had only tested the low once at that point, plus my first contextual target to the downside of 5814.0 was still some way off.

Finally, trade #14 was another great opportunity for a short that ended up being a winner.

Is Trading a Marathon or a Sprint?

Trade #1, 12 & 14 on this particular session (01/07/16) were golden opportunities. Without context and a basic understanding of price action, it’s not so easy to separate them from the other 11 trades which occurred over that period. But that’s exactly what we did in the EU Session Trade Room.

Trading is a marathonFor the most part, trading is a marathon not a sprint. But also knowing when to make your move to press home an advantage and being confident enough to do so, can really make all the difference to a trader’s level of success.

Of course the idea of Power of Quitting (POQ) can be a great one at times too. Taking a win and then quitting can be a really powerful way to build confidence, especially if you are either on a terrible run of results or you are yet to taste trading success at all. However, if you understand when the odds are stacked in your favor and know when to push the gas pedal, you can achieve some fantastic results.

But to do this, you must be practiced with context and patient enough to wait for the right context to appear – trading more at the wrong moment is likely to give you more losers than anything else.

It is possible, if you define the specific contextual boulders that you are looking for, to capture and back-test using that context as a variable. By doing so and implementing a variable POQ based on context-based findings and rules, you can give yourself a far greater chance of aligning yourself with the opportunities that the market wants to give you, rather than artificially cutting them short or over-trading.

 

Trade well.

More posts by Coach James can be found here

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Coach James

James began his trading career nearly a decade ago, learning his craft in fixed income derivatives. These days, he predominantly day trades index futures using auction context as the vital ingredient to his approach. James is a firm believer in the importance of trader psychology and how it can make such a monumental difference to how well a trader performs.

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