Day Trading: Follow the Trend

By: George Angell

The following is an excerpt from George Angell's Inside the Day Trading Game

The more information you can gain from a market open, the better prepared you will be to make intelligent trading decisions during the day.  Often, the open will provide a very valuable clue as to the day’s trend.  Here, the indicators will be time and price.  Put another way; is there sufficient volatility to suggest a genuine trend day?  Or does the price action suggest a market which will simply meander?  The answers to these questions are vital because they will determine whether you should be an aggressive trend follower or whether you should simply fade the trend.

How do you tell?

The key is early volatility.  Does the market want to get somewhere in a hurry?  Remember, you are monitoring both time and price.  First, concern yourself with the question: does the market want to trend?  Second, ask yourself if it does, in what direction?  Here’s a general rule (no rule, remember, is 100% accurate), taking into account both time and price:

If the S&P futures move in excess of 100 points in the first 15 minutes of trading, following the open, chances favor a trend day.  If the futures do not move in excess of 100 points within that time period, chances favor a non-trending day.

The thinking here is that a quiet opening often means a quiet day.  A non-trending day suggests one kind of trading strategy and a trending day another.  On a non-trending day, you must reverse the strategy 180 degrees, buying strength and selling weakness.  You might decide to leave non-trending days alone on the theory that the potential profits do not warrant the risks.

Obviously, this is a very simple way to approach the market.  We all know that some “quiet” days turn into barn-burners, and that dramatics on the open occasionally give way to the doldrums in the afternoon.  But if you keep your eyes on the hidden clues, you should be able to ferret out the best opportunities.

Some days, of course, are much easier to trade than others.  The real tricky days present the real challenge.  Since you never really know what the market will bring, it is best to wait at least ten to twenty minutes prior to making your first trade.  By then, hopefully, you will have some important information that provides a clue as to direction.

What kind of information?  The range, the momentum, tick volume, support, resistance, and so on.  The notion of time and price suggests another consideration.  That is, if say, the market is going higher, it will probably trade in a certain stair-step fashion – up, a little back, up again, and so on.  The point is, certain things should happen in a rising market which are consistent with that type of market action.  Let’s consider an analogy.  If a train traveling from Boston to New York takes approximately five hours to complete its journey, then the twelve noon train leaving Boston should arrive at its destination in New York at approximately five o’clock in the afternoon.  If the train is five or ten minutes late or early it is no big thing.  But if the same train is four hours off schedule, something is wrong.  It is the same with the market.  Certain price objectives should be met if the market is going higher.

The Bucking Bull Strategy 

Do not minimize the notion of time.  A retreat from a price level can be highly significant.  For example, let’s say that yesterday we had an open which had all the subtlety of a bucking bronco bull.  First, there was a break of 80 points on the first 5-minute bar.  Typically, such a strong down move would suggest the market wants to get somewhere in a hurry, thus you better be the seller.  Fair enough.  But, since price and time are everything, you have to ask yourself is the market going to stay down?  Here you have to decide quickly whether to sell in hopes of the bottom falling out – or wait and see what happens.

Here’s what happened.  After the 80-point break, the market stabilized and soared higher.  Not such a great place to sell!  But wait.  The move wasn’t over.  Ah hah, you think, tried to fake me out.  Now, on the rally, you begin to think about buying.  Not so fast!   You know what happened, don’t you?  The market declined, taking out the stops below the intra-day low, and then it took off to the upside, trending higher all the way to the close.  What a ride!  But one you surely must learn to take if you want to be an S&P futures trader.  It takes real courage and stamina to trade a rough-and-tumble market such as this one.

I believe there is something valuable to learn every day.  And that day proved it, just because it was difficult finding the trend, it wasn’t impossible to trade.

Looking back at a day like this, you can see why it is important to not place all your hopes on any one trade.  Chances are you will be whipsawed.  But analyzing this market in the calm after it has occurred reveals some important truths.  Not only did the market go down before it went up, but it went precisely to the point where it would provide the most pain to the most players: below the intra-day low where, no doubt, the stops were placed.  Did you ever say to yourself: gee, I was right on the direction of the market, but I lost money?  Don’t ask me why this bucking-bull, up-and-down market activity exists.  I only know I don’t want to be its victim.

Where Are The Stops?

Whenever I take a trade I ask myself a simple question: where are the stops?  This is an easy question to answer – above the intra-day high, below the intra-day low, above and below any short- or long-term resistance or support respectively.  These are your points of vulnerability.

The market gravitates to the stops.  If you wave a red flag in front of a bull, it may not charge you immediately.  But make the bull mad enough and you better be prepared to be gored.  So the stops are the red flag.  Once the bull charges and the stops are cleaned out (resulting in losses to the hapless stop-placers, who, remember, were only trying to do the right thing), ask yourself what happens to the market.  Does it falter?  Does it go dead?  Does it stay down?  Or, as in the example above, does it soar back up quickly?  In this case, the quick move away from the stops is the sign that the market wants to move up.

To see the validity of this, begin to monitor the market yourself, pinpointing the probable stops, and track the direction of the move away from the stops.

Once a low has been made and the stops placed, that low becomes a magnet.  Bullish sentiment can keep the low from being approached again, but if the market returns to the lows and the selling dries up, the market has but one way to go – up!  The same phenomenon – in reverse – can be observed at the tops of markets.