Monday, September 28, 2009
09/28/2009 Trend days can kill your account
I know its been awhile since I made a post but today seems like a great opportunity to discuss something that gave me trouble early in my trading career. The TREND DAY. Do I need to define trend day? I don't think so, its pretty self explanatory, the market just keeps trending. Simple. This kind of day can wreak havoc on indicators and account equity ! We're gonna look at the chart to see how to avoid these pit falls, but first some background...
With an absolute lack of economic news, M&A took the spot light. Abbot made a big bid for Solvay and Xerox gobbled up business process outsourcing company Affiliated Computer Services. Johnson and Johnson got in the mix too, buying up an 18% stake in hand sanitizer maker Crucell. While it is good to see companies making acquisitions, I wouldn't get too excited, this economy is still in the toilet in my opinion. BUT the market has less and less to do with the economy these days, its mostly just squiggly lines on charts, and if you treat it that way you will make way more money. I promise :)
Looking at the chart, the signal to go long occurred between 4:30 and 5:00am with the two SMI lines crossing, the particle oscillator crossing above the 0 line and the OBV panel painting a red square indicating divergence in price and volume. What's that, you were still asleep?? Traders don't sleep!! Ok, I'll admit I was asleep too...
The next entry was at 9:45am on the break to a new high. 1048 to be exact. The SMI's were already stretching to the upper range at a value of around 60 -- with 80 being over bought. Why go long? If you were looking at the bigger picture (daily) you would see a textbook bounce off the 20 day MA. And I MEAN textbook man! Good traders are always, ALWAYS, looking at the bigger picture for clues. You must understand that. The big fish don't care about 2 ES points, and its you Vs them. got it? cool.
Back to the chart. Lets say you got in at 9:45 am at 1048. By 10:11 you should be taking profits of 7 points with the SMI's red and the OBV painting diamonds left and right. The key is to recognize that this is a trend day early and make sure you are on the right side of the trade. The white box shows the SMI pegged above 40 most of the day. I'm sure any indicator I put up there will be pegged all day too. The market reached its fair value and stuck there. The particle oscillator stayed green all morning and that means NO SHORTS! By the time it crossed the 0 line again you should have been teeing off on the fourth hole and maybe on your third beer ;)
Trend days can be tough. Alot of traders that don't see the trend end up trying to bet against the market when their indicators are showing oversold/overbought conditions. If you can't trade a trend day then just don't trade. Stick to what you know. Lets say you traded 3 lots today and took profits at 4 ticks, 6 ticks and left a runner for 7 points...that's 38 ticks ($475.00!!) . Way better than any McJob I can think of.
Here are the take away's: Recognize the trend, don't fight it, and walk away when you got money in your pocket. Its really that easy.
Thanks for reading guys. All the indicators are from Big Mike's trading blog VIP section. make sure to pay him a visit and if you got a second click those Google ads over there on the right. Feel free to comment too. Later,