I received an unusual number of frustrated emails from traders after yesterday's strong trend day. All of these were daytraders, and all were not able to capitalize on the trend day. Frustration over missed opportunity led to attempts to make up for the deficient performance, which then worked against them and created losses. What to do about such a situation?
First off, let's get expectations right: daytraders, on average, will tend to underperform on trend days. The buy and hold trader will, on average, milk more of the move than someone who tries to enter and exit many times in a one-way market. In addition, many trend markets start strong, meaning that daytraders who wait for an indication of direction for the day will generally enter the move once it's under way. That's tough, especially when the trend day follows some choppy, range days. The intraday trader who gets frustrated because he/she doesn't catch the entire move is probably feeling as much frustration from perfectionism as from market action per se.
(One common version of perfectionism: waiting for the trending market to pull back before participating in the move. By definition, trending markets are not going to give sizable pullbacks; they tend to be one-way markets. This doesn't mean you have to buy highs and sell lows on such days; it simply means you redefine the notion of pullback. In my trading, I use pull backs to negative NYSE TICK as one guide).
Second, let's recognize that catching trend days is essential to success in the recent market. I notice that Rennie Yang of Market Tells points out that we've had more such days in the past year than in the past decade. Fighting such one-sided markets is a recipe for losing. In such a situation, frustration is a completely appropriate response, speaking to the need to identify trending moves as early in the day as possible. Focusing on frustration as the problem misses the reason for the frustration in the first place: the difficulty making early identification of trending moves.
One way I like to channel this frustration is toward studying the characteristics of the kind of trading day I'm trying to master. By studying many examples of trend days, you can find common features and learn to identify and act upon those in real time. Here are some features to look at:
1) Breakouts from short-term ranges (overnight range, previous day's range, multi-day range, opening range) on strong volume;
2) Persistently strong NYSE TICK (note that we didn't get a -500 reading until almost noon CT on Tuesday);
3) Persistently skewed volume at offer vs. bid for ES futures (This shows up nicely on a Market Delta chart; the cumulative Delta moves steadily higher, as large traders keep lifting offers);
4) Strength in market's leading sectors (Note how, once again, financials led the way for the broad market on Tuesday);
5) Confirmation from correlated markets (Note the upswing in interest rates/decline of bond prices as the flight to quality unwound; the Yen weakness);
6) Extreme readings in the day's advance-decline readings and TRIN.
Because trend days open near their lows (highs) and close near their highs (lows), you're generally safe entering on pullbacks in NYSE TICK. Entries after relatively flat price corrections often work well also.
But nothing substitutes for studying these markets and internalizing their distinctive features. The best treatment for frustration is prevention.
Catching Market Breakouts
Identifying Breakout Moves