Wednesday, October 31, 2007

Trading Results for Wednesday

I couldn't help myself, and traded the afternoon session today.

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I went into today's afternoon session with a model/hypothesis in my head. Many stocks have a nice little run-up ahead of earnings, and then sell off once the earnings report is released. Well, the S&P500 eMini Futures market seemed to be following the same pattern in my mind - for the past week, it trended up towards resistance, and once today's "earnings" report (via the FOMC interest rate announcement) was released, there was a knee-jerk sell off in response to the news. But this was a selloff amidst an uptrend with bullish bias intact, so I thought it would be just a temporary pullback, and not a real bearish, sentiment-changing selloff. I watched the tape for confirmation of my hypothesis, and saw the First-Thrust-Pullback pattern unfold before my eyes. The initial reversal from 1534 occurred very quick. It took just over 5minutes to drop from 1542 down to 1535, and just under 5minutes to run from 1536 up to 1542, which doesn't sound very fast, but I perceived time to pass by very quickly while I was watching the tape. The trade rate must have been five or six thousand contracts per minute, some institution was dumping their positions at a furious rate, and another institution must have been just waiting for that dumping to finish so that they could kick off their buy programs. In any case, when the trade rate spikes up like that, it must be a pivotal moment. When it ran up to 1542, I tried to enter a long trade. I had thought that the pullback was from 1543 down to 1540, but it turns out I was obviously too early, and the pullback was deeper than I expected. I estimated a 50% retrace from 1534 to 1542 would be somewhere around 1538, so that was where I placed my initial stop. I did a double take and shook my head in disbelief to see the market come down to the EXACT tick just to take my stop out. But I've had this happen to me so many times now (watching the market take my stop out before continuing on in my expected direction), that I was unfazed by my initial 3pt loss. I knew it was just a pullback. I continued to watch the tape chop around at 1539-1540. When it tried to challenge previous mini-resistance @1542, I knew that this was "it." I immediately entered a limit buy @1540. I didn't have time to setup a bracket order, so I entered my stop after I was filled. I then proceeded to do some other "stuff", and only checked in on the markets every 5min. to move up my stop as per the 20bar EMA trendline. When the market peaked @1558 and started coming back down, I had a decision to make - should I play for a possible second leg up, or take profits now? Since we were nearing the last hour of the session, and thoughts of a last hour reversal popped into my head, I decided to play for a possible second leg up, and moved my stop up to 1551.25, and left it there. If the market dropped down to 1551, I thought there would be a low probability of a second leg up.

Anyways, the key to success for today's trading was being able to recognize the First-Thrust-Pullback pattern in real-time. Though my initial attempt to play this pattern was not successful, that did not imply that the pattern had failed, rather it just meant that I had to re-adjust my trading and use better stop placement.
The funny thing was that the market again retraced 50% of the move up before reversing to end up @1552-ish for the day.


Traderkenny said...

why don't you post some more topic like that. it's really useful. :)

Phileo said...

Hi TraderKenny,

Thanks, I'm glad (and pleasantly surprised) that someone finds my ramblings useful.
I will be making more posts of this nature once I get back into the full swing of things. Don't hesitate to check in soon for an update !