Successful
Trading Is a Matter of Capitalizing on the Peaks and Surviving the Valleys
By Jea Yu,
Co-Founder, Undergroundtrader.com
How many times have you
traded a certain method or pattern in the opening hour of the market day and
made a nice profit only to trade that EXACT pattern setup a few hours later and
ended up with a loss? Have you ever
had those days where the Dow was up 100+ points, but you were barely able to
squeeze out some profits due to the excessive chop?
Have you had those days where the market is in a tight range and yet you
score some big early profits? Have
you ever made nice profits in the morning only to bleed them back throughout the
day? Perhaps, this caused you to keep digging harder and before
you know it, you are deeply in the red by the end of the day?
As active traders, you have all likely fallen into every one of the above
scenarios. The typical reaction is
to blame the methods for being faulty as the search for the ‘holy grail’
method/setup continues onward.
One of the most important
aspects of successful trading is identifying when the right environment presents
itself on a micro and macro level. As
most traders focus on finding that ‘holy grail’ method, they overlook the
palpability that the environment could be the key underlying factor for success.
If it were a matter of just methods, you should be able to employ the
exact setup at any time throughout the day and get the same results.
This is not reality.
After years of trial and
error, the methods for me have come around full circle.
I have finally realized as long as methods converge and produce a profit,
they are sufficient. The real key is identifying when to employ those methods.
As traders, we must always keep in mind that we cannot control the
markets. We can only control our actions. We
can control when and at where we play the market.
This power cannot be taken for granted.
Placing ourselves in the right fertile market environment may
tremendously increase our odds for success.
The key to success is identifying and placing ourselves in those FERTILE
market conditions and staying out of INFERTILE market conditions.
Don’t mistake a fertile
market for an up or bull market (eg: Dow +100).
Have you ever had those days where the Dow was up 100+ points but you
were barely able to squeeze out some profits due to getting so much chop? The next day the Dow is in a tight range yet you are stacking
up some big profits? There’s no
correlation.
To many active traders, the
definition of a fertile market is one that has immediate followthrough,
effective foreshadowing, momentum and trend channels. Think about
immediate followthrough. In my
opinion, this means a stock going from point A to point B in a direct move as
opposed to going from point A to point B in a very choppy, zigzag, choppy rhythm
that constantly overshoots underlying supports.
Without delving too much into the methods (those will be explained in the
next article), the 8 and 13 minute 5 period simple moving averages should hold
consistently on trends without any candle tails violating them.
A choppy trend is one where literally every candle will violate the 5
period ma supports only to close above them in the last few seconds before the
close. These are very tough to
stomach or trade. We simply stay away from them.
These are only useful in hindsight, in my opinion, because they threaten
to reverse the trend on every candle. Who
needs that stress? Not us.
Although the equities markets
are open from 9:30 a.m. to 4 p.m. EST, which is six and a half hours, there are
not six and a half hours of solid opportunities. In fact, I believe there are usually one to two hours at best
that provide tradeable opportunities during the day. This can be hard for many traders to swallow but if you go
back and review your trades, in most cases, the profits usually come in the
first and last hour. The losses
usually come in the form of head fakes and stops from the four hours between 11
a.m. to 3 p.m., which is also referred to as the deadzone.
The intraday fertile trading
environment is the opening hour from 9:30 a.m. to 10:30 a.m. (give or take 30
minutes). As a caveat, it’s
best for less experienced traders to start at 9:45 a.m. after the opening chop
slows a bit as the moving averages firm up.
This is where the most volume, immediate followthrough and trending will
take place. This is where you can
make a trade and reverse it and still make profits on the overall trade because
the volume is there. You can’t do
this when the volume slows down in the valley period from 11-3pm (give or take
30mins). There will obviously be
exceptions but keep in mind that they are just exceptions.
Flat stocks/markets are not
tradeable for the most part. These
are infertile market periods. One can always make the argument that you can play
size and try to work the spreads, but the reality is that compared to a fertile
market environment, it’s not worth the effort.
Remember, the key difference between speculating and gambling is that a
speculation gives you 80/20 or better odds because you have some time of a
foreshadowing indicator whereas gambling is 50/50 odds based on blind luck.
The path of least resistance is the road we want to take as traders.
No need to make life harder on ourselves.
Markets moves in cycles.
Trading environments are the same way.
Fertile market conditions to infertile market back to fertile market
conditions. I refer to this as a
peak and valley cycle. From a macro view, the earnings season is the peak period
while the period in between earnings is the valley period. Peak periods provide the most opportunity to make profits.
The peaks periods are also more forgiving.
A sloppy trader, who constantly chases entries, will still make money in
a peak market period. The same
sloppy trader will unfortunately get crucified in a valley market period.
Therefore, it is imperative that you identify the peak and valley periods
ahead of time.
Despite popular beliefs, this
has absolutely nothing to do with whether the Dow is up 100 points or flat.
This has more to do with the overall flow of the markets.
The markets tend to brim with intraday action when there is an abundance
of effective news and the most news comes in earnings periods.
If you’ve played Texas
Hold’em Poker, you know that everyone ‘eventually’ gets the same cards in
time. To be consistent, you have to
‘throw away’ most of your cards. The
difference between the pros and the amateurs is that pros make big scores on the
peak periods (good cards) and lose the least on the valley periods (bad cards).
Anyone can win big hands with prime cards; the problem is that most end
up blowing out and tilting when the cards go sour.
Pros capitalize on the peaks and survive the valleys.
This is what makes them consistent.
This same analogy can be applied to trading.
Good traders capitalize on the peaks and survive the valleys.
The problem with most losing
traders is they push just as hard in the valley periods as they do in the peak
periods, whether they even know it or not.
Think about this. The peak
period of a market day is the opening hour, then the valley period kicks in.
Have you ever made nice profits in that first hour only to slowly lose
back the profits through out the rest of the day?
This is a common theme among traders.
The thrill of success and fast profits often tend to keep a trader at a
fast pace even as the market slows down. Frustration
kicks in after a few stop losses as the trader gets more and more desperate to
regain the former profits. The
trader eventually overtrades and digs himself into a deep hole.
In most cases, the trader knowingly overtrades but hopes that he may get
lucky. The markets start off at a
40-yard dash pace, but then slow to marathon mode into the last hour where it
speeds up again. This is the pace
that traders need to be aware of and adapt to.
When the market slows down, traders must slow down.
Any diverging will only result in losses for the trader.
Work smarter, not harder or
filter tighter and trade less. Trading
is one of the only endeavors where less work (trades) makes more profit.
I always tell my traders that the tough part is not making the profits,
but keeping them into the close.
What is the opposite of love?
Most people would answer hate. If love is hot and hate is cold then put your
hand on a butane flame and then put it on a piece of dry ice.
The result is a burnt hand either way.
The opposite of both love and hate is apathy.
As traders, we are always
told we need to maintain DISCIPLINE and PATIENCE throughout the day.
I look at it a different way. Traders
need APATHY. APATHY produces the
same results as DISCIPLINE. Many
traders often curse their exits and entries constantly self imposing stress as
‘shoulda, woulda, coulda” is used throughout the day.
While being hard on yourself may seem like it’s a good thing, it’s
actually detrimental. ‘Shoulda,
woulda, coulda’ should be replaced with ‘whatever’ or ‘c’est la
vie’.
Apathy leads to closure,
which leads to peace of mind. You
should not be concerned about trades you don’t make. The way to maintain apathy is to walk away from the screens
throughout the day and pursue other activities. A physical detachment from the screens is essential.
Many of my most consistently profitable members will trade the opening
hour only and go about the rest of their day with their businesses or day jobs.
Do they care about missed opportunities? No. Do they care about the
thrill of victory? No. Do they care
for consistent profits? Yes. How do they achieve this? They maintain apathy
which gives them closure and a fresh perspective going into the next trading
session.
It’s also important to
understand that profits are not mean’t to be made every day.
Three profitable days, one even and one drawdown day is good.
The most profitable periods throughout a trader’s year will be during
the peak periods ala earnings season. Therefore,
trading heavier shares in these periods and treading water through the valley
periods is the best way to pace your overall trading.
Bottom line:
1)
Trading environment is more important than methods alone.
2)
Stick to the opening 9:30-10:30am hours and the last hour 2pm-3pm
intraday fertile/peak periods.
3)
Trade heavier in peak period earnings season and lighter in between
during valley periods.
4)
Expect to make most of your money in peak periods (opening hour and
earnings season).
5)
Three profit days, one even and one drawdown day per week is good.
6)
Maintain apathy by physically detaching yourself from the screens after
the opening session.
