This week we will look at some techniques for very short term trading. The great thing about the S&P 500 is that even on a boring day (like this one), it is still possible to make a lot of money. This volatility is one of the reasons why day trading has become so popular lately. Why sit and wait weeks to make $15,000 when it can be done in a couple of hours on the S&P? At least that's what all those new day traders are asking themselves! Below is a 2 minute chart of today's action:
As the chart shows, it was a flat day with no trend. Trend following systems get really beaten up in markets like this, but if you are a discretionary trader you are less likely to get whipsawed to death during these kinds of periods. Traders working with very short term charts like this tend to use support and resistance levels to try and pinpoint good areas to initiate trades. There are many such methods in the public domain, and many of them work very well. In this showcase, we will be using our own S/R levels, which are plotted on the chart with horizontal lines.
Our strategy when doing any kind of trading is to look for some sort of confluence signal among diverse indicators. In this case, we will add our second Exhaustion Bar study (qual=6) and our genetically adaptive momentum curve. To clarify things for those who are not used to these indicators, MA_MomentumGA(cyan) is a method of predicting where MA_Momentum(red) will go in the future. As you can see, the cyan line does, in fact, lead the original both to the upside and to the downside. This is an extremely powerful indicator, but it takes a little practice to learn how to use it properly.
There are labels on this chart that mark important areas where trades would have been considered. We will discuss them in order starting from the right side:
1. This point actually occurred about an hour before the close on Friday. A blue Exhaustion Bar (Exbar) buy signal popped up as we were approaching the yellow support level for that day. Prices hovered around the support line for about 15 minutes while MA_MomentumGA (=MomGA) made new lows. The MomGA curve finally crossed over the original curve as price broke slightly beneath the support line. Aggressive traders could have placed a buy stop above the recent highs and would have eventually made a profit if they could have held the position though the chop until the close. Generally its best to pass on trades late in the day unless a perfect setup presents itself.
2. This point occurred on the first bar of the day on Monday. It was accompanied by an Exhaustion sell that marked the high of the move from Friday. MomGA confirmed the sell 4 bars later, so aggressive traders would have had a good opportunity here. Notice that there are no resistance levels to be seen at this time, which would have filtered out this trade for more conservative traders looking for higher probability setups. Conservative traders will miss a lot of moves, but that's all right! There are always enough trades to go around.
3. This would be an excellent point to get out of shorts off of the open. Notice how prices stopped and reversed right at the second support line. MomGA gave us a clue that this might happen by making a bottom before the support level and then crossing over MA_Momentum on the second bar of the bottom. Although there was not an ExBar signal here, the timing between price and the other two indicators were such that even conservative traders could have gone long here.
4. The ExBar sell signal at this point is the final warning to take profits and possibly reverse positions. The most interesting thing about this level is the behavior of the MomGA curve in relation to MA_Momentum. MomGA is screaming at the top of its lungs to look for a turning point here. Although there is no resistance level to confirm the other two signals, this is another fairly safe trade to look at, especially once price starts rolling over the way it did.
5. Time to get out of shorts! ExBar signals are always good to use for profit taking in short term positions like these. MA_MomGA also crossed over to the upside, confirming the buy, but there is a problem with the resistance level. Notice how we are moving up into an S/R level rather than down into one for a buy. According to the S/R levels, this is a place to sell, not buy! So there is some conflict with the indicators. When in doubt, stay out.
6. This is the cleanest signal of the whole day. All three indicators are telling us to go long. We have moved down into an S/R support level, Exhaustion Bars have signaled, there is bullish divergence in MA_Momentum, and MomGA has long since crossed over the original momentum line to the upside and is now in positive territory. Everybody should have been in on this one.
7. Number 6 was a great setup but short lived. Exit on the ExBar. Even though MomGA does cross beneath MA_Momentum, it does so on an increase which tells us to be cautious. Notice how we are not really at any significant levels either, which makes this short too risky to take right now. Better to wait until price is closer to that resistance level.
8. This is a little better. We have an ExBar sell and price bouncing off a resistance level. It takes MomGA a little too long to confirm this one, but traders who saw things start to drop could have gotten in at a decent price. Everyone else would have been a little angry. This is one of those trades that you see forming but miss anyway.
9. This is an interesting formation. Notice the bearish divergence between price and MA_Momentum. These are always great signals. The problem is that price is a little too high over the S/R line, and there is no ExBar to confirm. We would have passed over this one. Notice the setup as price first crossed over the S/R line near the beginning of the upward rising trendline. This was an OK setup (no ExBar though) that aggressive traders would have been stopped out of.
This was a little lengthy, but we tried to be thorough with the analysis. Trading intraday like this is very exciting and potentially very rewarding. The problem is that it is also very stressful and can destroy your account if you make a lot of mistakes. It's best to be conservative and wait for the prime setups. The perfectionists would really have only had one trade today (#6), but they would have made money off of it. That's what counts! Stay tuned...
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