While the market is in a range, fading is the name of the game.
What time has the DOW usually been reversing the past few weeks and how can it be traded?
Hey, a very good morning to you traders and a belated happy new year, let’s get straight into it. So the end of last year I did an in person presentation in front of a group of traders and one thing I talked about was becoming the trader you want to be in 2017. Something i do every year, analysing 2016, but more importantly focusing on what you wanna work on for the next year to improve your trading consistently.
Okay, so one of the things that I didn’t mention was when I look back through my career, my trading journals and looked at it compared to my PNL for certain months, certain quarters, one thing that stands out to me heavily is that my very best spells or my very best segments were when I was spotting price action strategies, price action setups I guess you could say that no one else was spotting so not just technical analysis where we are analysing and saying yes that is the head and shoulders here, support resistance here, its basically saying listen, is there a pattern in what’s happening in this window of time that I can trade. If there is, trade it, double down on it, double down on it, until it stops working. So with that in mind, this year is very much gonna be focused on looking for these patterns that people, other people, aren’t seeing, trading them and then seeing where we are going. That’s gonna be with the videos as well, sharing the patterns with you, sharing the things that I spotted, sharing my analysis and then be talking about how I traded them and then we get into the circle and decide what went right what went wrong, drilling right down into the tape aspect of it.
(Okay so, lemme just clear this window here because this is for something else that I have been doing) However as we know, lets look at a 60-minute of the DOW, I got a DOW here. (let me get rid of all those with me, or we’re going to view all drunk). Okay so we’re in this kind of ranged and what we’ve been here for a while, we’re sitting here, we’re doing not a lot, we’ve got loads of catalyst the downside and loads of catalyst the upside potentially but we’ve done nothing, haven’t quite tagged the 20,000, yet teasing the bulls, but in the range, so what does that mean in terms of short-term trading, so lets have a look if we got to the 15th minute, if I set it to a 5 minute chart here.
What it tends to mean is that the market will oscillate and my golden rule is and I’ve said this before, that if you are in range you need to be looking to fade extremes, doesn’t necessarily mean to be shorting highs of the range and buying lows of the range coz that range could be very very fairly wide. But what it does mean is that if you’re getting extensions rather than looking for that pullback continuation trade that I like so much its more a case for looking for that drive, the pullback and the fade away, and that is the name of the game when you are in the range. Is that gonna work everytime, no its not, however when you’re in that, thats the place to look at it. When you’re outside of that range and volumes coming in yes, then you will ignore that you get rid of that completely, and you look for your pullbacks, to your moving averages or however you wanna quantify them, looking for the extensions the further moves, the little stretches that take out the people off the stops of the upside who are wrong or to the downside if we are the other way around.
Okay, so with that in mind, couple of other things I have been looking at, one of them is the opening drive and we’ll share that another time but today I wanna talk about the turning points and the time of the day of the turning points. Now just for background here why do I look at time of day because it’s so important (I remember a spell back, can’t remember what year it was) But the footsie used to reverse almost almost on the dot 3 o’clock UK time, okay it would be 3 o’clock and it would just literally turn around and go the other way and that was tradable for such a long time.
And it was something that’s beating up people towards spotting but it was such a profitable thing.
Okay, so moving on quickly what have I spotted here. Well, you know I talked about this before but if you look at the window of about (whoops lets get our drawing pen out), about 4 o’clock UK time to about 6 o’clock US time so if you’re spreadbetting the DOW this is the time window we’re looking at and while we’re in this range this seems to be working. Look how many times we reverse at that particular time. It’s not accurate in terms of its not exactly on the dot however buying is being shut off, selling is being shut off so how do you trade that.
If you are long you start to scale some out if its pushing into that time window, maybe you start then, look for some kind of price action pattern some kind of tape patterns thats gonna give you a turn. So, let’s look at the chart to see exactly whats going on. So, look here, we have a reversal around here, around this 5 o clock level, 5:15, so that fits in with our window quite nicely, yes it’s a wide window but you know sometimes you’re not goint to get accurate. If you’re sure you are starting to look to cover that shore into that 4 to 6 zone. If you’re looking for a fresh trade, you’re looking to fade extreme moves in that time zone.
Let’s move on back to the day before, same kind of thing look at the low here, 4 o clock on the low, good drive as well, probably got a lot of people showing this breakout but it was within that sweet spot window 4 till 6, look at this 4 o clock we reversed and actually got a full reversal from that. Go back again, reversal here, 4:35 huge reversal back up, huge reversal back up, and infact we got double reversal in that time window. So, the one take away from that is do not look for continuation trades in that 4 to 6 zone, and that’s if anything, they dont have to necessarily look for fade trade but not looking for a continutation trip. Look at this one again, 20 past 4 and the further up to that 6 o’clock zone, this was the fade zone, this was the time not to get involved this was the time to look for reversals and subsequently came back, tagged the VWAP (VWAP is the Volume Weighted Average Price white line on the chart) and almost did a full reversal. Let’s move on we’ve got more examples here because this is just a continually solid pattern. Half past 4, back up, reversal again, no real direction, no real volume coming in on that day. Same on this one, this is interesting because you know we got this drive up. And this pushed on for quite a long time, you know how long this pushed on for? But, again it ran out of steam around that half past 5 or in that 4 to 6 window, no more continuation running out of steam. Okay go on guys look for yourselves, have a look at the chart and look to see again the good drive, 20 to 5, we have a reversal.
So, what is the pattern to look for and how am I going to trade that. What I am gonna do is if I am in a trade I’ll be looking to come out of it between that 4 till 6 window. 4 till 6, UK time, sweet spot, look for any extension like this great extension, high of volume that kind of fresh move to exit on or vice versa if I am not in a trade and I am looking for some kind of reversal. Am I in that time window, yes, are we extended, yes, are we getting a flush, are we getting a key level, all these check lists we do.
Okay great, now I am just adding that extra layer of edge knowing that history as all in the last few weeks is all I am bothered about as a day trader. We have seen as reversing at that time so gonna give it a go look for some sort of pattern, maybe you don’t have to hit it straight on the flush maybe you’re looking for that higher-low type trade. Whatever you should appoint, you structure it in with your setup or what you like to see whether that is oppressed to lows or fail and then go, whether it’s oppressed to low a higher-low and go, whether that’s oppressed to lows real extensions and go on that or vice versa.
But adding the extra layer in which is what I am gonna be doing, the 4 to 6 reversal area will just give you that confidence to take it a little bit more aggressive perhaps. Will it carry on working? who knows, however the point is you spot these patterns and then you extrapolate them out and keep moving and keep trading until they stop working so thats what we are looking at next week specifically and also be looking at some more stuff as I do some study on the opening drive trying to find a pattern on that, this is the DOW by the way so perfect for spreadbetting between those 2 hours.
Alright guys take care and have a great trading week.