How to spot a reversal in a volatile market
E-mini S&P 500 Futures Trade on January 29, 2020 (41 Ticks)
Hello! Hope your trading is going well this week. Rogerio here, strategy and performance coach with the Mind Muscles Academy.
We are back with the Trading Strategy Insights series. This week the topic is how to spot a reversal in a volatile market. This trade also highlights the analysis and decision making behind staying or not on a trade that is taking too long to develop.
I'm writing this text on the same day I took this trade, January 29, 2020.
This part I'm explaining in text only. There are charts below for the analysis and execution part of the trade. (Strategy Workshop members, refer to the recording of today's session for a more detailed explanation.)
As usual, I start the analysis with the daily chart and the CME reports. We can see that the last 3 days have been quite emotional and with an above than average volume traded. From Friday, January 24 to Monday, January 27, the S&P 500 futures March 20 contract had a 104 point drop, from high to low! Settlement alone closed had an 85-point drop in just 2 days!
Then, the next day, January 28, settlement closed 38.75 points above the previous day. This is volatility!
Volume was lower in this up move, compared to the down move, and so was Open Interest, adding only 2,400 contracts from the previous day.
The context today is a market still recovering from this last emotional down move and also waiting for the Fed Interest Rate Decision and FOMC Press Conference.
Looking at the daily chart, price is right in the middle of the high and the low of the last 3 days’ range.
- Steps 1 and 2: Not shown on this image. I see the last few days’ price range on the daily chart and where the price is negotiating right now relative to the previous days. Right now, price is attempting to move above the 20 SMA. For this part of my process, I refer to my swing trade line chart to see the price movement, key levels and value areas for the last 2 weeks.
- Step 3: I noticed the price is gradually moving up from a previous low 2 days ago.
- Step 4: Price has just crossed the previous day's settlement price (the orange line) and continues to move up.
- Step 5: Volume profile from the last 2 weeks shows a low volume node not far from where price is moving right now. To me, this demonstrates the potential for a move up without much resistance.
Entry, stop and target
- For this part of my process, I refer to my intraday range chart to see the price action and order flow. I look for enough confluence factors to make a high probability entry with a good reward-to-risk.
- Step 6: Cumulative delta is pointing up, showing that buy market orders are dominating the market right now.
- Step 7: The 20 SMA is also pointing up, showing an early sign of a potential reversal.
- Step 8: Price action shows 2 consecutive pin bars in this last up move, then price negotiating above the settlement price. Yet another confluence factor that the up move is strong.
- Step 9: I enter the trade with a buy market order at 3278.75, right after the price pulls back to settlement and resumes its up move.
- Step 10: I place my stop loss at 3276.50, 3 ticks below the last swing low, and also below settlement.
- Step 11: I place my target at 3289.00, at the top of the last down move, but a few points below the day's high. This target placement gives me a 4.5 to 1 reward to risk on this trade.
- Step 12: This trade is developing slowly. At 9:56 AM, exchange time, 27 minutes after I enter the trade, I start to see mixed signals in order flow, particularly in the Time and Sales windows, with price ticking up and down with strong volume on both sides.
- Step 13: The region around 3285 starts to show some resistance from sellers.
- Step 14: I add a Volume Profile for the day session to see where the strong money is negotiating right now. I notice the price is moving towards a low volume node.
- A long time has passed. I'm on this trade for 2h42min already. Should I just exit this trade where it is? Or wait a bit longer and trust my initial analysis?
- Step 15: Cumulative delta is pointing down, showing that sell market orders are hitting the market. This is one important factor against my current long position.
- Step 16: Despite the fact that sell market orders are hitting the market, the price remains on a narrow range, not going below 3282.50 for the last 2 hours.
- Step 17: I decided to move my stop up to 3281.50, 4 ticks below this channel. This trade has now a stop gain of 11 ticks. Notice that Step 10 is my original stop. This is the first safe spot to trail stop since I entered the trade.
In the previous image, what kept me on the trade was my impression that a strong absorption was going on. This was based on the divergence between cumulative delta and the price movement.
( Strategy Workshop members, refer to the recording of today's session for a more detailed explanation of delta divergence and absorption. )
- Step 18: As soon as the strong sell market order activity paused, cumulative delta pointed up immediately, confirming the absorption theory.
- Step 19: Price moved up really fast with the buy-side order flow, breaking up from the previous channel and high volume node.
- Step 20: Price hit my target at 3289.00 and retraced back. This trade took a total of 3h04min. Although it took a long time, it was never negative.
- Step 21: This trade produced a very respectable 41-tick gain, with no heat at all.
My patience paid off one more time. I was only able to hold on to this trade because I used a combination of different signals to validate that the higher probability was that the price moved in the direction of my target. This is another proof that when we use objective criteria to make our trading decisions, there is no reason to exit winning trades too soon or to let losing trades run.
I'm a strong believer that combining different techniques, such as referring to CME market data, looking at the context, price action, order flow, and volume profile is a key to success in trading.
I invite you to check our Strategy and Execution Workshop,a unique hands-on live training program, done in small groups, in which participants learn the process of developing and testing trading strategies and then improving their trading execution through the use of exclusive tools that we provide at Mind Muscles for Traders. I hope you learned something useful for your trading in this lesson. If you have any questions, please post them here or send me an email at email@example.com
Did you miss the rest of the Trading Strategy Insights series?
- Trading Strategy Insights 1: E-mini S&P Futures Trade on August 22, 2019 (44 Ticks).
- Trading Strategy Insights 2: Case study - using the same technique for 2 trades in crude oil and e-mini S&P 500.
- Trading Strategy Insights 3: Case study - using fundamental analysis to gain an extra edge in a crude oil futures trade - 91 ticks
- Trading Strategy Insights 4: Case study - using order flow analysis to gain an extra edge trading futures
- Trading Strategy Insights 5: Case study - using order flow analysis to spot a market change in real time
- Trading Strategy Insights 6: How to spot a reversal in a volatile market.
- Trading Strategy Insights 7: How to use market structure data to plan a high probability trade.
- Trading Strategy Insights 8: How to use price action to enter a high probability trade.