This is generally good advice for trading all day… but I especially watch for this in over-excited and news-driven markets. Today there was all kinds of talk swirling around about whether there’d be an auto bailout or not, and so on. Markets were in a big downtrend intraday. Price action was getting whippy and volatile. Plus, for a while today Paulson was speaking on TV, and you never know what he will say next to spin the market’s wheels.
So, what can a small trader do? When it’s hard to follow the trend, you can often still follow the pain.
In a big trend, every time price reverses a bit, you can see the top and bottom pickers start to take positions. I always get the urge to join them, because surely the markets need to retrace by now, riiiiight?
Wrong. In a strong trend, especially after 3PM Eastern time, the markets don’t need to retrace, ever.
So, I always fight the urge, and don’t go against the trend at a time like this. What I do instead, is watch for the countertrend plays that don’t go anywhere. Now, regardless of who’s on TV, I know for a fact that lots of eager traders are now underwater on their hopeful positions. I take a position with the trend, and against these trapped traders. As price goes against them, they will have to bail, and this greatly improves my chances of making a nice profit. This will usually work even if I turn out to be wrong, and the trend reverses. You can be sure that the market will flush out the weak hands before heading their way.
See why I like this so much? :-)
Here are two examples from today:
Look at the volume pressure and other indicators to glimpse inside the market… but the main thing I watch for is a compelling-looking countertrend trade. One that I would want to take, myself. Then, when that trade doesn’t move at all, and often careens sideways just under the hurting traders’ entry points, I get ready to pounce and take their money from them. I jump in as red bars start forming, and price starts breaking back down.
In violent markets, these are often the easiest trades you can make. Works well for me, anyway.
I find this song as a nice theme to such trades..
Clubbed to Death
http://www.youtube.com/watch?v=_YCGtT_FRYg
Enjoy!
E.