Earlier this morning, I put on a nice trade: shorted ES at 1394 and covered at 1389. Let's take a look at what made it a good trade, and then we'll examine two deadly sins in this current market that make it difficult to make good trades.
The first--and perhaps most positive--aspect of the trade was that it was my first of the day. I sold ES a little after 10 AM CT, which means I sat there for a full 90 minutes watching the market move around not making a single trade. Instead I waited for what I considered to be a perfect setup. There was enough volatility that I felt I didn't need many winning trades to have a good day.
The second positive aspect of the trade was that I was sure of the market trend (down) and waited for a nice bounce before selling. I then waited for the bounce to lose steam before entering. Instead of trying to pick a top, I waited for the market to become unable to make new highs (see chart above) when buyers came in before committing my capital. That enabled me to take a minimum of heat on the trade and ride the market trend down.
The third positive aspect of the trade was that I had a lower peak in ES around 9:45 AM CT to lean on as a reference point for a catastrophic stop. My trade was predicated on the notion that ES was unable to make new highs on fresh buying, as indicated by the NYSE TICK readings. I also saw that fewer stocks were making fresh short-term (30 min) highs. If those conditions had been violated, I had a stop loss in mind to limit the amount of capital at risk.
The fourth positive aspect of the trade was that I waited for longs to capitulate, as indicated by increased volume (and increased hitting of bids), to make my exit. That allowed me to take my profits without being exposed to short-covering. It also enabled me to wait for the next bounce, gauge its strength, and re-enter with yet other selling positions.
What I'm hearing from quite a few traders is that they're making a deadly mistake: They are confusing market movement with market opportunity. That is leading them to overtrade the market and get whipsawed by the considerable volatility. Movement is only opportunity if it coincides with your own, well-grounded setups. If you don't wait for the right entry conditions, movement offers more risk than reward. A volatile market allows you to be patient: You'll get your move eventually.
The second deadly mistake traders make is that, after a trade such as the one above, they'll keep trading, rather than return to their patience. Why? Sometimes it's out of excitement and greed, but often it's because they're trading small. Even a relatively modest prop trader might be trading 50 contracts. This means that the five point winner has just put them up $12,500 on the session. That's a respectable day in itself; there's no need to put on another trade unless it sets up sweetly.
But what if, instead of trading 50 contracts, you're trading 5? Now your five-point winner has paid you out $1250. Not bad at all, but also not a killing if you're hoping to support a family on your earnings. So, instead of trading large, the small trader trades often--and commits the deadly sin of getting away from opportunity.
Going with the overall trend, waiting for the right opportunity, letting markets show they're strengthening or weakening before you make your move, keeping stop losses close relative to potential reward, taking profits aggressively when you get an extreme move your way, trading large enough to make an acceptable income from one good trade per day: these are part of the mental model I've created for my own trading.
Staying grounded in that mental model means avoiding overtrading. Volatility is not necessarily opportunity and trading small positions more often won't provide the returns of trading larger size with the proper, selective setups.
By the way, as a parenthetical note, observe that we've made fresh bear lows in the S&P 500 Index, but not in NQ, ER2, or semiconductors. I'll be watching that.
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