Trade of the Day

Trade of the Day

Every day brings something different to trading.  Yesterday was down, today is up, or days of dull trading resolve in increased volatility.  There is always something new.

One thing that doesn’t change is the trade of the day.  This is the best trade the market had to offer that day.  It doesn’t mean that the trade of the day made the most money or ran the farthest.  It’s the setup that’s important, and it’s a choice one.  The criteria that come together to make a “Wyckoff Story” are especially good on the trade of the day’s setup.  Let me show you what I mean from today’s trading.

Trade of the Day: What Want to Take a Trade

Technical traders often have a detailed description of their trade setup.  For example, a popular trade setup would buy the market with an ADX over 30, an oscillator returns to its zero line after making new highs, and price pulls back to a 20-period moving average.  Buy at the moving average.

We do things a bit differently.  We don’t approach trading with the idea that if price and selected indicators do X and Y and Z, then buy or sell.  That’s too mechanical. Trades placed in this way often result in losses.

We are assessing supply and demand—the buying and the selling—and reading subtle but significant ‘market tells’ to create a trade.  Let’s see how this works in the accompanying chart.

Trade of the Day: Chart

Here is an intraday chart of the S&P futures for Tuesday, November 5, 2019.  The trade of the day occurred not long after the US session opened, but before we get to that, let’s look at the critical Wyckoff Story that preceded this trade.

Coming into the trading day, the very first thing I notice is that the market was unable to rally over yesterday’s high (3083.75 dashed line) in both the Asian and European sessions.  On a daily chart (not shown), we would clearly see the subtle shortening of the thrust as a market tell, but we can also see it in the intraday chart.  Note that there were three attempts to rally above yesterday’s high. This activity indicates that buyers were not strong enough to take the market higher or sellers were stronger.  Either way, it’s a bearish tell.

Next, notice what happens next: the market makes a new low for the day.  This creates a lower low after the market had made a lower high.  Lower highs and lower lows is the definition of a downtrend, isn’t it? Another bearish tell.

Next, notice the volume on the swing or wave down to the lower low.  Big volume comes out and the result of that volume is lower prices.  Sellers are active.  Supply is overcoming demand (S/D).

To summarize: we were unable to rally above yesterday’s highs after three attempts, The move away from yesterday’s highs resulted in the early stages of a down turn, and the move was made on heavy volume, indicating strength to the downside.  That’s our Wyckoff Story.  It’s a story of buyers who are weak and sellers who are strong.  In this environment, we look for a short opportunity.

Trade of the Day: Trade Entry

We find that short opportunity at 10:00 AM ET, a time period associated with morning turns in the S&Ps.  We see the market rally up, and initially, price action looks constructive as closes become firm.  But a quick look under the hood reveals the buyer’s problem: there is not much volume behind the move.  We call this No Demand (ND).  Just like the activity around yesterday’s high revealed weakness in the buyers, the volume on this rally shows buyers lack the strength needed to take the market up to new highs.

Thus, when we re-enter the area of heavy supply (black arrow), we see buyers become even more weak.  How do we see this?  In the price action.  We notice the sellers starting to take over in the two price bars that close poorly at the top of this rally.  This is our cue to enter the market short for a nice trade.

This is the way we trade.  Not mechanical but piecing together what the market is doing by its own actions in a logical and rational manner.  We do this to assess the supply and demand present in the market and to locate choice spots to take trade.  We work on our skills at reading the market and assessing the supply and demand each week in my Deep Practice program.  It’s an inexpensively priced, weekly training in how to do the type of analysis presented here.  Each Thursday evening, traders from across the globe with varying skill levels from novice to expert meet in Deep Practice to develop and hone their trading knowledge skills and abilities.  Why not join us?  For more info: Deep Practice