The hourly chart of the index I am trading is a great indicator to determine what is happening in the market at any given time, it will give you a close up of all the price action during the trading day. What I like to see is a confirmation of the hourly chart with the daily chart. This will give me a clear signal to avoid specific type of trades.
For example, if both the hourly chart and the daily chart is showing trading above the moving average, I will not take a short or a long fade type of a trade no matter what. If there is divergence between the hourly chart and the daily chart, I will always defer to the daily chart first and the hourly chart second for guidance.
If the trading bars are completely below both the hourly EMA and the daily EMA I will only take short or long fades but if the market is not trading below the hourly EMA but is trading below the daily EMA I may consider taking other type of trades. Therefore remember, the going against the hourly chart may be ok if other swing trader indicators are telling you a reversal is happening, but going against the daily chart is looking for trouble.
While the EMA is used to determine the short term direction of the index, the hourly RSI is used to determine the strength and weakness of the direction the market is moving in. It is very important to keep an eye on the RSI indicator during important price levels near daily high and lows, pivot areas and 123 reversals, typically the oversold and overbought levels will be in line with current market activity.
If the RSI is indicating intraday oversold levels I would be cautious to initiate a short trade, similarly if the RSI indicator is reading an overbought level I would think twice before initiating a long position.
I also look for divergence between the RSI and the index near daily high and low levels to see if the market is running out of momentum. This is very useful in a range bound market when the trading range is bouncing of high and low areas for a few days at a time.
If you recall, I discussed the Trin at length when discussing different market indicators. The Trin measures the relative rate at which volume is flowing into the advancing or declining issues on the NYSE. If more volume goes into the advancing issues than declining issues the Trin index falls below 1.0 if more volume goes into declining stocks than advancing stocks, the Trin index rises above 1.0.
The key to using the Trin indicator correctly is to look at the trend or the change in the Trin as opposed to just looking at the reading outright. For example a reading of 1.20 is considered bearish but if the reading before that was 1.80 then the current reading would be interpreted as bullish reading. Since the number is getting smaller it suggests that volume is flowing into advancing issues and that there’s sustained buying pressure in the markets.
Conversely, a reading of .65 may be considered bullish but if the reading started at .35 and several hours later it ends up at .65 this suggests selling has been occurring, therefore this would be interpreted as selling pressure coming into declining issues. So do not look at this indicator in an isolated way, always consider the trend.
Also look at the overall patter of the Trin throughout the day. If the Trin is trending higher and making higher highs as the day continues it’s probably best to avoid long trades and if the Trin is trending lower and making lower lows thru out the day it’s probably best to ignore short swing trades.
More info about this topic check out http://www.marketgeeks.com/stock-swing-trading-strategies/
One of the key price levels the trader needs to constantly keep aware of is the high and low of the past 2 to 3 trading days. If the market penetrates these levels the market will be in trending mode if doesn’t it will be in range bound fading mode. Also it’s important to know these levels because the markets tend to exhibit excessive volatility or a very quiet trading range when trading closely to these price levels.
Not only are these levels important to know so that you can determine if an entry or an exit set up is occurring but you can also see how other traders are reacting when price reaches these levels. If tight trading range develops and volume is low the odds are the prices are going to reverse near these levels.
On the other hand if the market exhibits range expansion with heavy volatility and volume especially after the first hour of the day, typically signals that a breakout outside of the support or resistance is likely to occur, especially when these market characteristics occur near the high and low of the last few trading days
The daily pivot levels are very important levels as you have learned from the previous section of this course. Several trading strategies are built around these levels and more importantly, many professional futures traders on and off the floor use these levels in their daily trading tool kit.
It is very important to keep an eye on how the market reacts near these price levels. If you notice that volume is low and prices keep bouncing off with low volume it’s probably a sign that a reversal or a trading range is starting to develop. If on the other hand you notice above average volume and a tightening trading range, the odds are a breakout may be on the horizon.
It’s also important to know exactly where the market opens in relationship to the daily pivot levels. As I previously discussed markets tend to stay above the pivot levels when prices open above that level and prices tend to stay below the pivot levels when markets open below those levels.
Also pay close attention to markets that open with gaps that reverse near the Support 2 and Resistance 2 levels. These could be very important signs that a reversal fade trade is setting up.
Always look at the daily chart of the market you are planning on trading before the opening of the day and throughout the trading day in case the market is near an important daily price level.
I always have a 20 bar EMA on top of the market I’m trading and look at it a few time before and throughout the day especially during days when the market is trading outside of the EMA. If the market is trading either above or below the 20 bar EMA I will consider the commodities futures market in a trending mode and will NOT take any reversal or fade type of trades till the market is inside a trading range once again.
While monitoring the daily price chart I will also look for Tail trading set ups and other chart patterns such as head and shoulders or 123, that provide indication that a reversal or a trading range may be developing in the very near term.
Check out this cool link about commodity futures trading as well.
In addition to the trading methods, there are other key levels and indicators that you need to keep in mind. These indicators will help you look at the bigger picture and keep a barometer of the market as you trade
The biggest advantage you have over large institutional traders is flexibility.
Most large trading programs are slow and completely mechanical. They are based on simple rules and the traders’ job is to execute trades, there’s no discretion. Being able to look at several market indicators before entering a trade, during the trade and at the time of the exit will help you make the best decisions under the circumstances.
Compare this to driving a car, the process involves turning the wheel and pressing two pedals but consider the many factors that you think about every few seconds while you are driving. You notice if the car in front of you is driving too close, you tend to decrease your speed during rain or snow conditions or when you’re driving in a neighborhood where children are playing.
You tend to drive faster when there are no cars on the road and more focused and aware as you increase your speed. This is exactly what professional traders do as they execute their trades; they monitor conditions using indicators to assist them in making trading decisions.
As a result, traders are able to address the following questions:
These indicators will give you a good indication of what is currently happening in the market and will put you in a position of least resistance.
The time to start monitoring does begin at the opening bell, but typically begins several hours before the opening bell and sets the tone for the next day’s trading session. Some traders monitor the actual foreign markets but I find that monitoring the overnight SP and NASDAQ and long term bond markets is just as effective, since they tend to price in and reflect any changes that occur abroad.
I typically begin looking at the market at 8:30 Eastern time, one hour before the opening bell. This way I have time to look at the overnight markets and check the news to see if any significant changes transpired during the overnight session. If you wake up and fine the overnight SP index futures contract up or down a few points, it implies that nothing significant happened overseas to have any impact on the U.S. economy.
If you wake up and do find a significant difference in the SP futures contract from the previous night it may be a good idea to see if something happened overnight in the foreign markets and how it can impact the upcoming trading session. If there’s nothing on the news wire or CNBC it may be the market is not reflecting a change in the foreign market but is anticipating some type of a news or announcement during the upcoming trading session.
Before the opening bells you should know exactly what type of news or announcement is scheduled for release and exactly what time the report is coming out. Remember the rules, you don’t trade the first half hour or 5 minutes before or after the announcement.
Sometimes volume will be unusually low because market participants are waiting for the report to come out so that they can trade off that information. You can use this to your advantage if the report doesn’t come out till late in the day. For example, you can take short term reversal strategies as long as you liquidate the position within reasonable time before the announcement is supposed to be released.
The key is not to get stuck in a position during the report when volatility is high and difficult to deal with.
The next thing you want to keep an eye on is volume, especially during the first half hour of the trading day. Typically volume is very heavy in the beginning and the end of the trading day. The volume should be above 12,000 contracts every 5 minutes of the trading day at least for the first half hour of the trading day.
If you notice that volume is lagging substantially behind these numbers there is very little chance that the market is in a trending mode. Typically, heavy volume is associated with trending markets while lower volume days are more characteristic of a choppy range bound market.
The second most important time of the day to watch volume is during key price levels. Any important price level such as daily high and low, daily pivot levels, short term support and resistance levels, chart patterns or any other key price level that is widely used should be examined very closely when the market is trading at these levels.
For example, if you see that prices are moving near the high of the day and there’s barely any volume or momentum behind the move and it’s lunch time, the odds are you won’t be seeing a major breakout to the upside any time soon. I know a small group of traders who key off daily high and low reversals using volume and they’ve been doing well for over 8 years now with such a simple strategy.
The point I want to make is not to look at the market you are trading in a vacuum, use volume to determine the underlying strength or weakness of price movement is key to trading near important price levels.
Another point to remember is that it tends to work better in a trending market instead of choppy markets. Most pivot strategies are fading or reversal style of trades that prefer choppy trading conditions. This strategy benefits from good volatility and a market that’s daily and hourly chart are moving in the same direction that you are trading.
The rules for the long side are as follows: If the market opens below the daily pivot point and trades above the pivot point, wait for a bar that trades completely below the pivot point the second time, the top of the price bar can be same as pivot level but not higher (then place a buy stop 1 point above the pivot point.
If the order is filled exit the trade and take profits when the market trades at the first resistance level above the pivot point. Put a sell stop 1 tick below the entry bar or three bars preceding the entry bar, which ever has the lowest swing low.
The rules for the short side are as follows: If the market opens above the daily pivot point and trades below the pivot point, wait for it to trade once again completely above the pivot point, it’s ok for the low of the bar to be same price as pivot point but not any lower. Place a sell stop 1 point below the pivot point.
The rules to sell are the same. If the market opens below the pivot point don’t do anything for first hour of the trading day. Find the lowest low in price that the market made during the first hour of trading. Put a sell stop 1 tick below that price. If the entry is triggered and the market does not reverse take profit equal to 3 times the distance from entry to stop loss and reversal level.
A buy stop and reversal level for two contracts is placed 1 tick above the pivot level. If the market comes back it will liquidate the first trade and initiate a trade going the other direction. If market does reverse up, liquidate position at R1 level. If position reverses back down liquidate at entry price of initial position.
The strategy works because it uses very simple rules to take advantage of the markets natural rhythmic pattern to begin the day moving in one direction only to reverse strongly and head the other way. This pattern occurs far too often compared days when markets begin the day in one direction strongly only to continue and build on such momentum.
Often time’s stocks and index futures contracts tend to trade near the high or the low of the day and look like they are breaking out to a new trading level. However by now I’m sure you have noticed the markets do not trend nearly as much as we would like them to and most breakouts tend to fail, this presents an opportunity for traders who want to take advantage of price reversals
One day a trader in my office told me a story about going to sea world and how interesting it was seeing dolphins swim very quickly to the edge of the pool.
He explained that if your standing far away it looks like they are bouncing off the wall of the pool. He showed me how it looked on the computer screen and it looked like a 123 pattern near the high and lows of the day, so we named the pattern Flipper after his dolphin story. The rules are very simple and identifying the pattern will become second nature once you see it a few times.
The rules for long entry are as follows: wait for the market to make the low of the day that matches or is lower than the previous day’s low, that’s the number 1 point. Continue to watch the market for a classic 123 reversal pattern.
If the order is filled place a buy stop 1 tick above the entry bar or 3 bars preceding the entry bar which ever has the highest swing high price. The profit target is the first support line (s1)below the pivot point.