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.
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. )
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.
With an Engineering background and a Masters in Business Administration from the Tuck School of Business at Dartmouth (New Hampshire, USA), Rogerio has a deep understanding of financial markets from both an academic and a practical perspective. His knowledge and trading experience includes fundamental, technical, and order flow analysis. In addition to his signature Strategy Development courses, Rogerio also publishes his Trading Strategy Insights on the Mind Muscles for Traders blog.
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