From the November 01, 2009 issue of Futures Magazine • Subscribe!

For safe profits, trade a delayed reaction

There are many ways to trade intraday markets in a risk-conscious manner. Most of these methods combine strict discipline with strict setups.

“Safe profits: Trade an intraday stair” (June 2009) presents the idea of going long only when you see an intraday bar chart showing consecutively higher lows and highs and only going short when you see an intraday bar chart showing consecutively lower highs and lows.

“For safe profits, trade narrow intraday channels” (August 2009) presents the idea that an optimum long opportunity is a fast bull market made prominent by the narrowness and 45-degree inclination of its intraday price channel, while an optimum short opportunity is a fast bear market made prominent by the narrowness and 45-degree declination of its intraday price channel.

“Trade an intraday hook to safe profits” (September 2009) presents the idea that an optimum moment to enter an intraday bull stair (consecutively higher lows/highs) is the moment price hooks (reverses) from a break to a rally, while an optimum moment to enter an intraday bear stair is the moment price hooks from a rally to a break.

These previous articles encourage a buyer to become increasingly aggressive as price: 1) hooks from a break to a rally, 2) shows a series of consecutively higher lows/highs, and 3) shows a narrow, inclined intraday price channel. They encourage a seller to become increasingly aggressive as price reverses those indicators.

BASIC TRAINING

Although they seem simple, what makes them hard in practice is the strict discipline they require. A market can display good intraday trending action and still not meet the strict conditions.

Before you can follow these techniques, you must first recognize that markets exhibit the conditions described above. Second, you must realize that the risk involved is indeed relatively low. Third, you need a zero-risk way to train before committing real money.

The best way to train is by opening a paper trading account. Test the techniques in practice. See if you have the discipline to wait for and act on the setups described above. Then start using real money but stick to small positions. Increase your position size only as you become more comfortable with the techniques.

This article expands this concept to related markets. Has there ever been a time when a market has moved so abruptly you were caught completely off guard? Missing out on a good intraday move happens to a lot of traders.

Different traders react at different speeds. Abrupt moves build over time. Often, there is aggressive buying in one market that’s followed by the same in a related market. Aggressive buyers can rush a market, forcing bears to capitulate. This aggression and capitulation allows buyers to push price into a high close at which point resistance can solidify. Next, aggressive buyers will target a related but untapped market. Rallies ripple across markets at staggered intervals as more buyers, belatedly, join the new trend.

Successive short-term ripples can happen within minutes, hours or even days of each other. One name for this is the “halo effect:” a strong, leading market can lift multiple markets. Conversely, when sellers rush a market, forcing bulls to capitulate, the name “hell effect” comes to mind: a weak, leading market can condemn multiple related ones.

This knowledge calls for another safe profits rule: Maintain a broad eye on market action. If one market rallies, shift your focus to markets still stagnant. Be a buyer in a related market that hooks higher, sets higher lows/highs and shows a narrow ascending price channel. If a market begins to break, shift your focus to the markets that have not yet broken. Be a seller in a related market with the same dynamics. The “halo” and “hell” effects give you a second chance to profit.

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