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.

Look at the chart on the left. It’s an overview chart, covering the entire day. Now look at the chart on the right… it’s basically showing just the last leg down.

So, the right-hand chart is just a “zoomed-in” view of the last leg down. But, look at how the trend channels look really similar! We have a push down, and a chop up, and a push down. Also, in both cases, the lower trendline on the second push down is pretty parallel and close in price with the upper trendline on the first push down. Also, see how the overall look of the volume splitter histogram is the same for both charts. Wow! It manages to surprise me every time I see it.

So, the internals of the last leg down are mimicking the overall day’s action, just on a smaller scale. If only there were a way to make use of this in a predictive fashion…

Anyway, it’s been a while since I’ve posted an example of self-similarity in price action. In fact, the last time was July of 2007! But, if you are looking for it, you can find it all the time.

Probably the #1 question I get is about how I trade my signals. So, here’s an example.

First, look at price action. I drew a horizontal trendline at a low where price reversed. This was right at Alla’s Average. So we bounced off Alla’s Avg, and maybe next time we’d push through it. As price dropped back toward that level, note that the big traders (magenta dots) went net negative and were dropping. I put in an order to get short if price dropped below that level. Then I put the cursor on the cancel button in case volume pressure pushes against me, and I don’t want in anymore.

Well, price hits my level while volume pressure is still dropping, so now I’m in. When the bar closes, I get a short signal from the bid/ask/stoch signal. If I didn’t get the short signal to confirm the entry by the next bar, I’d get back out for break-even (hopefully grabbing a tick to cover commissions). I’m also looking for volume pressure confirmation, in that the big traders should continue to push down. They do.

Now it’s a matter of chosing an exit. I’ll start looking for an exit when the big traders step aside. Note that the magenta dots heading up is not enough. As long as they are below the zero line, they are net sellers… so it’s not urgent just because the dots are rising. However, in this case, we got a bit of a drop in price, but the magenta dots kept going up. That’s a warning… not the kind of divergence you want to see. It’s not sustainable. So, time to exit, or at least lighten the size you’re carrying short.

As you can see, it was right to take some profits, as price reversed, and the big traders continued buying.

3 Trades for 3 wins today. I traded the first hour, and took a stab at an afternoon trade just for laughs. +5pts per contract. I traded 987 share bars today, as 1597 was feeling too slow.

In this video I also talk about one of my typical stock plays, and how it’s a different world from index futures trading.

I don’t know if I’ll even turn on my platform Monday, since I expect volume to be pathetic… but knowing me I probably will.

Many of you have heard that price action has a certain fractal nature to it. Here’s a pretty straightforward example which I spotted today.

Below is 2 hours worth of SPN candles from today. Look at the overall picture: a big move up, a reversal to the 38.2% retracement, and a move back up to the same price as the top of the first move.

Now, look “inside” that second thrust up. It’s a miniature replica of the overall move! You can see that it goes up, retraces to the 38.2% retracement, and then heads back up to the top again.

Look even harder, and note that the first thrust has a single red candle about 2/3rds of the way through on the “overall” move, and a very flat candle in a similar spot in the “replica” move. There are a couple other, more muddy similarities, that are easy for me to picture but hard to describe. Are they a perfect match? No. But they are similar.

Of course, it doesn’t have to be so incredibly blatant to qualify for “fracticality.” But:

• Most people picture the famous Mandelbrot Set and its embedded self-similar replicas when they think of fractals.
• Blatant examples make for better blog posts.