Tuesday, January 5, 2010

How to make something out of nothing.

Here's a quick review of today's market action and how I analyzed it, and most importantly how I traded it. To set the back drop here, when I have my day trading hat on (which is all the time nowadays) I am looking to short the high of the day and buy the low of the day, cash out by close rinse and repeat. What you won't find here very much anymore is projections on where this market is headed months from now. Please, it is hard enough to get a handle on what is going to happen an hour in advance during the trading day nowadays, never mind a month or months. Whoever tells you they know what is going to happen in the future in this market with certainty, stay away from:) However I will post a quick rant sometime before the weekend, but those type of posts will be few and far between.

No I have found through giving up a lot of paper gains these last few months that it is far more profitable to intraday trade these moves and capitalize each day than to see you P/L fluctuate around like those who have held on to positions especially the last few months. The problem is this type of trading is difficult and more stressful, but for me more rewarding to see hard work pay off. I hope to show you some of these lessons I learned the hard way and hopefully track my progression through the new year.

So here it goes, first off we have to set the theme for the day. We just had an uptrend day yesterday with a wider than average range for the last couple of weeks. Usually the day after such a move is consolidation, small range market action while the market builds value in a new trading range. Which was exactly what we got today, with a whopping range of 8 points from high to low, how does one make money on a day like today?

Range extensions is the answer, we need to find the overbought/oversold conditions and counter them, forget trading in the range on days like this it will get you chopped up and spit out. On a normal day you usually look to draw you fib extensions from the high to the low of the previous day and vice versa, but after the uptrend day you would typically look to draw extensions from the globex high to low and vice versa for initial support/resistance because the bigger the range the farther away the extensions will be and after an uptrend day you typically won't see a big enough range to test the extensions. Which was the case today.

As you can see on the 5 min chart posted above range extensions worked beautifully on both the short and long counter trades. Price sold off into the 1025 area extension which happened to be the value area low as well, I took that long trade for a counter. Typically my target is usually the midpoint of the day or the globex session whatever I am using, which for today was 1128.75.

I played conservatively and went long @ 1025.50 and sold @ 1128.75 for 3.25 pts. Then price rallied into the extension long target as the XLF showed strength early on. I then shorted the 1132 level back into the midpoint @ 1128.75 for another 3.25 pts on the short side. So in an 8 point range day I was able to come away with 6.50 points or $325 per contract for the day, making something out of nothing! Boy if we had those wonderful 80 pt ranges like we had last fall I would be rich, oh well got to make the best out of the situation!

I will continue to post support/resistance levels each night or early morning with extensions and hopefully these will all start to make a little more sense.