Monday, March 23, 2009

The Trading Rodeo: Staying on That Bull

A very experienced trader commented to me at the end of the day, "It's amazing how much opportunity there is if you just keep your focus." On a day like today, where we start strong out of the gate and end very close to the day's highs, it looks so easy in retrospect to just buy and hold for a killer day. What isn't apparent is all the counter moves and choppiness between the surges that can knock you off the bull that you're riding.

As any rodeo champ knows, you stay on that bull by moving with it, not by fighting it. Once you lose your center of gravity, you're in the dust, making sure the bull doesn't stomp on you.

So what are your centers of gravity as a trader?

One important one is price levels from trading ranges. There are many relevant levels and ranges during any particular day. Some of the ones that I emphasized in the intraday Twitter posts were the ES 791 overnight high and the ES 802 multiday high.

A useful rule is that, when we break out of a range--particularly on strong volume and volatility, with most sectors participating-- we don't fade that move unless and until we see prices move back into that range. In other words, if a breakout is genuine, we should not return to that prior range.

What that means in practice is that, once we vault above the price level corresponding to the upper edge of a range, we may consolidate and pull back a bit before continuing higher. If your aim is to ride a trending move, you don't view that normal profit taking as a threat. Indeed, it could even be an opportunity to add to a position.

To be sure, there will still be those times when the bull bucks and gyrates, knocking you on your seat. I wouldn't fault a short-term trader for getting out of the way when weakness entered the market near 12:30 PM CT. Still, as the Twitter comment pointed out, we did manage to stay above the key overnight high price level, setting up a second wind for the bull. Knowing where your ranges are helps you identify when you're rangebound, when you're breaking out of ranges in a trend, and when you're re-entering those ranges to reverse a trend.

In short, you don't try to predict the end of a move; you have to wait for the market to tell you it's over. Similarly, you don't lean one way trying to predict which way the rodeo bull will toss and turn; you keep yourself centered, maintain your feel for the movement, stay loose, and react. Everyone gets tossed at times, but it's amazing how, with your focus, you can find quite a bit of opportunity just by staying on that bull a little while longer.