Blog for Trading Success

I received an email asking for my details about why I exited the ES trade. I’ll make that the subject of tonight’s blog.

In “Acceptance of Decisions’ Consequences” (http://tradingsuccess.com/blog/371-371.html), I said “Over the weekend, I decided to exit the longs mainly because the rally since May 9 had been on declining average volume”. This is the comment I have been asked to elaborate on.

In this case, I performed two types of volume analysis:

1. A Ray Wave average volume analysis and compare the average volume of the previous impulse moves down with the average volume of the current impulse moves up.
2. I also compared the average volume of all the up impulse moves in the current up swing.

Figure 1 shows the volume analysis. I have colour coded the pairs for easier comparison. The rally up started well. The first leg (blue) up was stronger than the first leg down. Each succeeding leg was about equal until the magenta leg when the up leg was a full 12% less (375k:421K) than the corresponding down leg. Given that the market had broken through resistance with this move, this was not a bullish sign. We only needed a strong day down to confirm the bearish signals.

Even more important, on the up legs, each succeeding thrust was on lower volume. This is not a volume picture I assess as healthy.

FIGURE 1 Volume

There was one final tell tale warning - the breakout volume. In early May we took out the highs set in February. The market was unable to hold the highs, and pulled back. Then we had an apparently bullish breakout BUT the breakout was on even lower volume than the earlier May breakout! At this point all amber lights were flashing red.

That’s the volume picture. Let’s turn to the price action of the breakout on May 16.

May 16 was a small range day - not the sort of day I want to see on a breakout. True there was a rejection of the lower extreme but given the volume configuration, it was enough for me to exit all longs in the night session on Sunday Central Time (CT). If I hadn’t exited longs by Monday May 19 pit session open, I’d certainly have exited by end of trading May 19. Figure 2 shows the price action.

FIGURE 2 Price Action

The signs were there for all to see. Yet I have acquaintances who have set stops on longs below 1380 rather than exiting early - ‘it may go up’ is the refrain. If stopped out, the trade will have cost them 51 E-Mini points. I’d much rather take my trade of a small profit than risk a 51-point loss when I see the market flashing amber and red warning lights.

I trust that answers the question posed.

But I want to emphasize that the ES result was one side of the coin. There is another side to this coin and you need to to be able to accept it. My Crude Oil result shows the other side.

I was stopped out of the remaining 10% of Crude Oil positions at 131.975 and now the market is back above 133 and may trend higher.

Now, I tightened my stops and took profits on the majority of the position as the market went to 135 at an average price of around 130.5. I did this on the basis that the market was ripe for a pullback and because May 22’s price action in Crude was in the same category as the ES breakout price action i.e.price action that for me signaled strong warning signs of a strong correction.

If the Crude Oil market moves to 150 without a 13-w retracement, I’ll have left money on the table. Note that I will not re-enter given my assessment that at these levels I believe it is a high risk trade.

But whatever the market does, I accept that I made the best decision possible given the state of my knowledge and personality. It is this acceptance that is the single most important factor to my success - if I were forced to choose one factor.

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