Wednesday, April 08, 2009

Learning to Scratch Trades and a Twitter Note

Earlier this AM, I thought I'd try something a little different with the Twitter posts and provided a tweet just as I placed a trade. The top chart in the 3-minute ES reconstructs my idea: We had an opening range breakout to the downside (1), and then selling dried up above yesterday's lows (and the overnight lows (2). That turned me bullish on the morning. We rallied above the 25 period VWAP moving average (3) and then held strength nicely over the next several bars, leading me to enter the impulse move on the long side at 817 (4).

The idea was to hold long for a test of the day's highs (821.75) and the Tuesday regular session high (822.25).

The trade almost immediately goes my way on a significant spike in TICK before consolidating over the next two bars. We then get another move up on solid (but reduced) TICK (5). At that point I was torn. Volume was not expanding on the upmove, but I really liked the trade idea. I briefly thought about taking a quick profit, but decided at worst, I'd scratch the trade.

As the bottom chart shows, and my 10:33 AM CT tweet notes, I did indeed end up scratching the trade. Very shortly after scratching it, sure enough the market zoomed higher, though struggled to vault above those price targets due to the low volume.

Psychologically, this is a nice example of a trade that doesn't work out, but that provides useful information. Directionally, my idea was good, but there wasn't enough volume/volatility at that time to sustain the anticipated move. The scratched trade highlighted for me that we would not break and sustain a move above the previous day's high unless fresh institutional participation entered the long side. That awareness was key in helping me avoid chasing the jump higher after my exit (which would have been a bad short-term decision).

Of course, I could have gone away from the trade frustrated that I didn't book a profit, but that's how perfectionism kills us. Instead of focusing on woulda, coulda, shoulda, I wanted to be focused on what the trade (and its aftermath) was telling me about the market. In short, it told me that we weren't sustaining selling (no TICK readings below -800), but that buying was slow, fitful, and choppy on the way to the price target. That helped me widen my stops and get back into the market on the long side when selling (a little after 11:30 AM CT) could not take out the prior lows (around 11:15 AM CT).

Viewing the scratched trade as a winner--and as a source of valuable information--is a key milestone for developing traders.

On a separate note, I've received a few emails and blog comments indicating that there is a delay in the posting of my tweets to the Twitter page. My sense is that they're showing up on the blog page more quickly than that. Those delays make it impossible to post short-term trading setups. For now I'll pull back, tweet about more general market conditions for decision support, and look for alternative ways to communicate about setups and trades.

Thanks as always for the interest and feedback.