As traders we are constantly asked to make adjustments as the market changes. One of the questions I am asked most frequently by potential recruits for our desk is “how has the market affected the trading system that we teach?” My response is that we teach the same system we have been using for more than a decade. Our system contains a variety of trading plays that work under a myriad of market conditions. This is true because the system that we have created focuses on the stocks that are most In Play each trading day. As broader market trends change we may place more emphasis on specific trading plays and trading skills that are most applicable to that particular type of market.
As a trader gains more experience they will recognize that certain trading plays work best on particular “types” of trading days. For example, if the market has established a Range Day then most support/resistance trades work very well. If the market has established a strong Uptrend Day then retracement trades in strong stocks work particularly well. The difficulty is in understanding the type of day that we are experiencing. During our AM Meeting I tend to speak about the potential scenarios that may unfold during the trading day. But until now we didn’t provide formal guidance on how to quickly recognize the type of day we are experiencing and which plays should be emphasized.
One of our young traders has assisted me in developing a road map that breaks down the type of day we are experiencing. For example, today there were clear signs during the Open that we were experiencing a Reversal Day/Uptrend Day: 1) We gapped above an 8 day down trend on the SPYs 2) There was no attempt to fill the gap on the Open as buyers overwhelmed sellers 3) Advance/Decliners ratio of 10:1.
When you combine all of the above it becomes extremely likely that the market will trend up for the day. What types of trades do you look for on this type of day? As I mentioned above you want to find stocks that are exhibiting relative strength. I set many price alerts on my platform at key resistance levels. On a day like today many of those price alerts are triggered. Once a stock breaches a recent resistance level I will buy on a retracememt. A good example from today was FSLR at 114. Another was AMZN at 64. Once these stocks traded above these levels they never traded below them.
One of the most difficult things to do in a downtrending market is to focus mainly on getting long. But if you have a system in place to identify and Uptrend Day then you will be mentally prepared to trade with the direction of the market for that day.
