Saturday, February 14, 2009

A Simple Trading Template

This evening I was listening to Peter and Anette and realized that the idea with the trading posts on this blog is not for readers to follow me; rather, the purpose is to model a way of thinking about markets that may be helpful in shaping your own trading methods. Here's a very simple template that has aided my thinking about markets as they trade in real time:

1) Market opens above or below the previous day's pivot on low volume and relatively narrow breadth and TICK: Play for a move back to pivot and consider a range day, with moves oscillating around VWAP;

2) Market makes a good move on strong/weak TICK and average or above volume early in the AM and holds above/below pivot on next pullback: Play for a move to the overnight high/low and/or the previous day's high/low;

3) Market makes a move above/below its overnight high/low early in trading on strong/weak TICK and average or better volume: Play for a move to previous day's high/low and R1/S1;

4) Market makes a move above/below R1/S1 early in the day on strong/weak TICK and average or better volume: Play for a move to R2/S2;

If you are playing for a move to the next price target, pullbacks ideally should not pierce the prior level (e.g., if you have broken above the previous day's high, the next pullback should stay above the overnight high in order to play for a move to R1.)

If you are playing for a directional move up/down, price should stay above/below the day's VWAP.

If you are playing a range market, you should fade moves away from VWAP that cannot sustain upside/downside price targets.

Your entries should provide you with favorable risk/reward, so that you'll make more on a trade that reaches your target than you'll lose if you're stopped out.

My Twitter posts in real time and upcoming posts will illustrate some of these ideas in practice. The links below will orient new readers to some of the price target terminology:

.
Posted by at