Professional traders know that over 70% of market volume is traded by computer algorithms. This means that the “old-school” approaches to trading are no longer working, i.e., chasing the market, cherry picking, and subjective guessing. I think to stay competitive in 2012 traders need a rules-based, mechanical approach. Otherwise, you’re just guessing.
New traders usually ask us, “How do you manage to get in at the bottom of a move and get out close to the top?” Sometimes we get “ticked out” of the market, and don’t always get in and out at the “best price”. Our goal is to capitalize on the biggest portion of a run in price. In other words, we’re looking to get in the market along with institutions and computer algorithms. Then, we want to sell to retail traders who are getting in way too late.
This approach is about anticipating a run in price before it occurs. Sometimes we’re wrong, and get stopped out right away. But when we can stack multiple reasons why an area should hold, it can show the potential for price to pop off an area within a few minutes of touching the area.
Futures were looking pretty ugly in the pre-market, with the ES down 11 points before the open. So, with the overall market sentiment bearish, I was on the prowl for longs.
Well, what’s usually popular in the markets is wrong. And about 8 minutes after market open we had a long signaled with great reward-to-risk available. We quickly saw the buying pressure building, which gave us a nice 3.25 point profit ($162.50 per contract).
Then we put in divergence right before the high of the day. As we pulled back to a “high probability area”, we had another long signal. This time buyers didn’t hesitate to drive the market another 3.5 points from the area where the entry was signaled. After the first two trades, we had 2 more longs before the lunch break. The last long was cut short before the market went choppy through the lunch hour.
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