Tue 13 Nov 2007
The Role of Intuition
Posted by ray under Miscellaneous
As a discretionary, technical trader, I find my intuition plays a strong role in my trading. Today’s price action in the ES was a great example of what I mean.
I subscribe to a few Sentiment Indicators, Floyd Upperman, Whisper Numbers, and Sentiment Trader. All were bearish to some degree, and one was bearish even though the COT figures used in the approach showed a bullish bias. Even though this view was consistent with the system’s rules, it struck me that there was just too much bearishness in the market.
Add to this the fact that many of the technicians I respect were looking for the market to head towards the spike low - the one formed on the S&P on Aug 16, and you’ll appreciate the reason for my discomfort. I prefer to be a lone voice; company, especially company I respect makes me uncomfortable. In short, my intuition was screaming ‘long tonight’. In my view the 18-d (monthly) trend is still up and there is no change in trend pattern in sight. So my strategy is to find spots to go long for this timeframe.
I had my strategy (long); I also had my zone - well sort of. The market was near the upper band of my entry zone (about 25 points away) but it was close enough for me. I had my setup to go long when I found that the market was going to gap up sharply.
Figure 1 shows what Peter Steidlmayer called ‘trapped money’, a form of Negative Development. The Trapped Money Zone is the zone between yesterday’s close and today’s open. Trapped Money needs a spike low and strong open leaving shorts trapped by last night’s price action. If the market holds above that zone tonight, then the probabilities favour a move back to 1532 and probably the 1576 to 1550 zone (basis cash).
FIGURE 1 Trapped Money S&P 80 Mins
In addition, on a seasonal basis, Nov 14 is favoured to be a down day. So if the market shows strength today, this is a plus for the bulls. And, after the 14th, seasonal strength kicks in. Figures 2 and 3 show the seasonal charts for November and December. The only seasonal danger is the period December 8 to December 12.
FIGURE 2 November Seasonal
FIGURE 3 December Seasonal
The difficulty with the trade was the large stop: below1438. For this reason I decided to take a half the normal size. Entry was relatively painless. After the initial run up, I bought the third half hour weakness, entering at 1459.25 (basis Dec), stops below 1438.
To stay in the trade, I’d need to see market close in the top 33% of today’s
If the market fails to close above 50% of its true range, I’ll exit the position. The reason is ‘trapped money’ suggests strength. A failure to close above the 50% mark is a sign of weakness. My initial target will be 1532 basis cash and I will be adding to my longs once I see confirmed signs of strength.
November 13th, 2007 at 6:41 pm
Ray,
When stops become large like your example above, do you also consider scaling in as a way of reducing risk? If so what criteria do you use to add more positions and move stops?
Thanks for your time.
November 13th, 2007 at 6:51 pm
Hi Robin
Scale in trades are like any trade I take: they need a zone, setup, entry and initial stop and the risk/reward is acceptable.
Each trade I take needs to stand on it own merits and each would have its own plan.
Since generally I buy on dips, what I’d be looking for is strength in tonight’s rally and a lack of volume on any subsequent reaction down. This would be the general criteria.
November 14th, 2007 at 12:49 am
A large gap up opening is not exactly what we want to see. Often, we’ve seen these large gaps fade.
As you often advise, I wait to see the opening prices hold past the first hour to see that the prices are still in the zone.
Your intuition is right as ES has turned into a nice trend day after all.