One of the keys to successful ES trading is being adaptive. What I mean by that, is that after you start out with what you think price will do next, you have to read the action of price and volume as it evolves, and adjust your trading to the clues as they are left behind.
You're probably thinking what clues?
Well before you can spot the clues, you first have to understand how various people trade. For instance, people trade various patterns, indicators, fibs, range breakouts; you name it someone's trading it.
Take almost any trading approach and look at an ES chart and see if you could have traded that methodology and made money over the long haul. If you're like me you'll probably answer no, you're probably thinking 'exactly'. So what's the answer, or what's one of the answers?
Price action will often trap the most number of traders possible on the wrong side of the trade. OK, so how does one trade while avoiding getting trapped?
Well the starting point is a paradigm shift. Instead of trading 1-2-3, J-hook, or other pattern breakouts, you have to be ahead of the curve. Typically these early entries are called setups. John Carter & John Person have some good examples. The problem is, even these ‘setups’ will frustrate you to distraction with how many times you can end up with a loss even trying to play the setup game. The key to success lies in listening to what the market is telling you by virtue of how price and volume are playing out. Think of it as filtering. My starting frame of mind is to look for a move that signifies the market makers just screwed retail traders, or are about to, and I get ready to use that information to my advantage.
Here are a few examples:
1) If you watch the first big move in the morning on the ES, it will often move either up or down and seem like it’s ready to reverse, but after a while it will extend the move (burning retail) then at some point typically reverse. So what are the clues the reversal is about to happen? You could pay a lot of money for market delta or some other service that can show you the number of trades hitting the bid vs. ask yada yada yada, but the easiest quickest and fastest way is to watch the movement of price while at the same time noticing how fast the volume bar is stacking up. If price isn’t moving, and volume is rapidly climbing, then you’ve found a sweet spot where the big boys are often loading the boat for the reversal. As I watch the price movement, it typically will stall there in a tight range. That’s when I place an order in expectation of reversal. A Stop loss would be entered a point or so off the lowest price in the range. The next thing you often see just before launch is a micro burst of buying (I call it a Flash Bang) that blows retail’s stops. This may or may not also be accompanied by a high TICK reading. This move in the market typically lights up active trader like a Christmas tree for less then a second taking out everyone’s stops before rapidly climbing higher. What I like to do, is place part of my buy at the level where volume is spooling up, and then set a buy order to add move if they do a further stop run. If their flash bang takes out my stops, then I immediately buy at market because that flash of orders very often signals they are going to lift price. You can scalp out of part of the position on the high of the flash, and as an option, as it comes back down, you can move a buy stop a bit lower on the second test, and drop your stop to make a little more room. But don't count on a second test. More often then not these things are like the starting gun at a race track. To cover my stop loss on this trade, I will often trade in and out of the congestion before the reversal to gain enough points using a couple of contracts to cover my potential stop loss. Sometimes I like to bank the points I make trading congestion, other times I use them to cover the stop loss on a larger trade.
2) Once the reversal occurs at some point price will break the number 2 point of a 1-2-3 reversal. If you look at a chart, you’ll see long green bars as the number 2 is taken out. Once the move has extended and upward movement of price begins to falter, it’s time to drop the trade. Again, this is based on the flickering up and down of price near the end of the long green bar from the break out. Basically it signals sellers are starting to hit the bid. Like playing chess, you need to be thinking 3 moves ahead and you get that edge by knowing what to look for.
3) Next you wait to re-enter long at the bottom of the measuring bar, with a plan to exit near the top of the measuring bar (or flag pole as some call it). Play this game in and out and if you can keep from laughing long enough while you do. Now while you are doing this, you want to watch out for when the markets signals it’s time to screw retail traders once more. There are several ways retail can be burned, but the concept is you’re reading the tape and anticipating the screw job so you don’t get burned. A classic ploy is for the range of consolidation to tighten near the upper end of the consolidation measuring bar. The real give away is when the range tightening occurs after a poke above the measuring bar. The poke above followed by a tight range near the top of the measuring bar is supposed to trigger greed, and cause you to buy long (near the top of the consolidation measuring bar) in fear of missing the break out. Probably the best way to play it is to short near the top of consolidation with your stop a ¼ point above the poke outside the consolidation-measuring bar. It’s a pretty low risk trade since your stop is right near by.
4) What often happens next is the market will head lower. How low you ask. Ok, that’s easy. Again it’s about knowing how people trade and how Mr. Market works to take their money. If you draw a Fib retracement from the morning low to the high of the consolidation we just broke down from (an example is shown below), the key levels for most traders are the 50% and 61.8% retracements. Normally fib traders will go long at the 50% mark with their stops placed at the 61.8% level. The way I’d play it is drop some near the 50% level, just in case, and take off the riders near the 61.8%. I’d enter long again just below the 61.8% with a stop a bit below there depending on how long we were in congestion, and how price was reacting. The longer in congestion, the further below the 50% retracement we are likely to go. Typically at the 61.8% level the market makers will trigger another one of their flash bang moves which is a great signal to get long at all costs. The target for this measured move should be the upper keltner channel set at 1.618, 39 period. A word of caution. A market is ranging until it isn't. You have to watch the strength of the move for clues as to when we transition into a trending market as that can always happen at any time.
The above chart shows several touches of a pivot line which lined up with the 5 min opening swing. The box highlights the area of congestion that fell below the 61.8% retracement when it broke, and stopped at the lower Keltner Channel just below the upper range of the opening 30 min swing low. The fact we closed above the 5 min swing low coming out of congestion was a good clue price was going to head higher during the day. Trading inside the 5 min range is kind of a no mans land as it often is a toss up which way we will break out of that area.
Thanks, and lets knock'em dead next week.
