Friday, January 6, 2012
Trading on small days
The summer and early fall of 2011 presented very volatile price action with huge range days. Those are characteristic of bear markets or markets in freefall. Its easy to trade any part of the day during such price action if you trade off bars with strong closes.
When the market normalizes and turns cautiously bullish, the range will narrow and it takes many bars to reach your profit target. During these days, usually the AM moves have the best chance of landing a profit before wearing you out.
Today's AM moves gave a modest profit and the price action dried up at two hours after open. Small overlapping bars moving a few points every hour are terrible for trading and will cause many traders to second guess their positions and get chopped up.
The difference in velocity of the move and adjusting to consequent expectations is hard for traders to adapt to. Traders always hope their entry will lead to the next big move, a breakout or a huge trend. The ability to gauge the price action and adjust targets down comes only with experience and no pattern can predict it. The closest sign is when bars become small and dojis.
The best way to trade these days is to expect a dampening after the initial moves of the market. The dampening may not happen, but any trader who entered near the open should be looking to get out and not get in and then stay out until a fBO or BP sets up.