Understanding Market Structure

Hi Mike,

1. Trade only the MOST in play stocks in the beginning as they have the best chance to move regardless of market action.

2. Wait for the market to break previous day’s range or some similar range from previous couple days trading.

3. Establish the the market itself is in play. Is there significant economic news, political unrest, or earnings news from a major company?

I hate to bring too much of a bias about the market into my trading each day. I would rather wait and let it show me. Often by the time is has shown me it will do very little I have already been chopped in failed setups.

Of course the risk in waiting for some of these signals may be missing or passing on otherwise good setups. I really feel like establishing a better sense of the markets daily potential and maybe some more quantitative rules for how aggressive to be will be a major step in my trading.

As always, thank you for your time and all the knowledge you have contributed to my trading.

@mikebellafiore

So what you are asking is: How can I tell the difference between a trend day from a range day? Wonderful job by you in understanding how important it is to understand the Big Picture or market structure for each trading day. Often we lose money trading trend strategies during a range day and determine we traded poorly. We may in fact have traded that opportunity as well as we could have; it is just that on a range day that trade is not as likely to work. This issue that you have identified is so undervalued by the discretionary intraday trader.

I love your ideas for determining whether it is a trend day. These are all spot on. I might suggest you start to look at three other ideas:

a) are there more stocks up or down during the trading day and find how this information correlates with trend days

b) determine how many stock are trading above or below VWAP and find how this information correlates with trend days

c) do statistical research on the likelihood that the day will be a trend or range day based upon its variables. For example, if a stock gaps up .6 percent what are the odds it will be a trend day? If SPY gaps up three days in a row what are the odds that the gap will be filled? We are doing statistical work like this on our desk.

You’re on the right track. For certain market structure days certain trades will not work as well. Keep working on this.

You can be better tomorrow than you are today!
Mike Bellafiore

The PlayBook

One Good Trade