Tuesday, December 29, 2009

More On Planning Trades and Mental Flexibility

My previous post outlined how I use price levels to set targets for trade ideas. Note how, in the opening minutes of trade, we could not muster any significant buying interest, as we had already come off pre-market highs. At the time, I noticed deterioration in several sectors, in the intraday advance/decline line, and among the euro and Aussie dollar vs. the USD. All of that suggested that, like yesterday, the bullish context was breaking down.

As a result, my trade idea was to sell the S&P 500 Index (above) for a move back to yesterday's pivot level of 1123.50, which was also a high volume area for yesterday's trade. I sold during the 8:34 AM CT minute at 1126.25 and then watched the market move promptly in my direction by about a point and a half. Volume was light on the move, however, and the NYSE TICK never went significantly negative.

I actively considered taking a profit at that point, convinced already that we were facing a slow, pre-holiday market. After a moment, I decided to hold for the original target but not add to the trade.

Almost immediately after, we bounced in stocks, and the U.S. dollar bounced firmly against the Aussie dollar. We also got a nice bounce in gold and oil. NYSE TICK also hit a morning high, although it was not a very high level. At that point, I changed my plan and decided to exit on the next market pullback and take whatever profit the market afforded me. My usual criterion for such a "next pullback" is the next move in TICK back to zero.

We got that pullback in TICK at the 8:49 AM CT minute; I waited to see if we would get any follow-through selling. That didn't happen and I worked a bid and exited at 1125 at the 8:50 AM CT minute.

It was very similar to yesterday's posted trade: quickly changing a plan on the fly when market conditions didn't stay in favor of the idea. We did, later, pull back to almost hit that pivot target, but both volume and the restrained range of NYSE TICK told me that this was not going to be a morning market that would sustain significant movement. That diminished the risk/reward benefit of holding the trade to the target.

Once again, we see that short-term trading involves a high degree of preparation and planning, but also the ability to adjust plans on the fly. In that sense, the trader is not unlike the battlefield commander or the football quarterback: it's important to have a battle plan or a game plan, but it's also important to know when to scrap that plan or call an audible at the line of scrimmage.