Wednesday Diary - Dodging the Bear Trap

Following the down trend in the hour before the cash market open I figured there was a possibility of one more push down to a support level of 1102-3. Given the fact that there was some significant news to follow I figured I may only get one shot early on at market open.



I therefore committed only one contract and went short at 1105 off trend support - not a great fill - and took some heat prior to delivering one point towards the support at 1105.


My pre-defined support level was based on the previous cash market swing lows in the last hour and in fact around the closing price.


I then sat out the rest off the session given that the volume dropped off as Thanksgiving holiday was on every ones mind.

P.S. I use volume charts as it provides a nice visual against my moving averages - even more so now that the ticks have been 'unbundled'. My pointer to use volume charts (over tick charts)came from an excellent blog that i follow - check it out:
http://www.movethemarkets.com/blog/

Tuesday Diary - Bull Trap

Into my third year of trading E-minis futures and I am still guilty of taking the bait. I fell into the bull trap on yesterdays open.

The lure:-

1. The previous days close as support


2. Support at 1 min moving average


3. Price and stochastic divergence at 1102 area

The basis of my frustration is not so much the bullish criteria that set my bias at open but the fact that I continued to trade long when the trade premise was broken. See the channel on price I have drawn between 1104 and 1102.25. As it broke 1102 i should have been flat and sitting on my hands never mind re-entering long.

The attempts long at 1097 price were justified as a fade on the 1 minute chart stretch but it was all too late and i got out just before the news announcement for some meagre pickings.

With the account down $300 my plan says that I sit out the rest of the session - only to watch the consolidation break on the 1 minute chart soar North without me.

With some help from Harry Hindsight here is how it may have played out:-

• Pre-market bias is short with 3LB confirming.
• Market opens and consolidates - wait for break out
• Market breaks down - wait for 1st pull back to moving averages and short at 1101
• Scale in on further confirmation and pullback
• Scale out at 1097.5 area as price and stochastics diverge
• Flat at news and wait for price to settle out
• 1 minute chart shows consolidation around 1098-99 area - wait for break out
• Market breaks long - scale in on first pullback to trendline support

It couldn't be easier - what d'ya reckon?

Monday Diary - No Trading for Me

Catch Up - Wednesday & Thursday

Wedensday 18th November

This post is a cath up from last week - maybe there is something psychological that i didn't make it a prioirity. These two days were my poorest perfroming last week.

Looking back I was probably on the wrong side of the market bias on all my sequences. i went long to early as the market stretched to the significant 100 price area. In the end i recoverd the sequence with around breakeven (less commissions). I would have doen better to short the pullback to 1min and 2584Vol moving average resistance.

I was definately off the pace as i shorted the pullback back to 1min trend consolidation at the 21SMA. However, what i failed to pick up was the 5 minute chart was stretched and the higher probability set up was to fade this strech to the long side. So my original premise long was in fact still in tact on the higher time based chart.

I did then realise this as i watched it go against me and got out with a nominal net loss for the day.

Thursday 19th November

It was a solid days trading but my biggest regret looking back at the performance was not holding on longer with my positions.

i read the short bias early (even though i missed the intitial pull back at open) but dodn't capitialse and ended two trade sequences +$100.

Fridays Diary - The Golden goose?

Today's trading was setting itself for a typical day after trend day. There was no disappointment as the early oscillations provided excellent opportunity.

From the channel that formed in the premarket activity I took a long position 5 minutes into market open on the bottom of the channel and moving average support on the volume chart.

3 contracts for 2,2,1 points provided a good end to the week. I decided as it was a Friday to stop there and preserve my gains for the week. I did note however the sell of a significant resistance level (purple arrow); the top of the channel and off the the previous day support/resistance price of 1092.5 (thick blue horizontal line). This provided plenty of scope to get the outlier day that Don miller discusses donmillerjournal.blogspot.com/2009/06/video-trading-outliers.html

Here's to next week with continued consistancy - just need to push for those outlier days!

Tuesday Diary - Pre-Market Oscillations

Since I am in-between engineering jobs I have been looking at the pre-market activity more closely. For me that is from 5pm WAST to 10:30pm when the cash market opens.

I have attached a snapshot of the trade I took at around 19:45 local time. Below it is the support resistance on the 610T that I laid out prior to the trade. This was based on previous late day resistance and overnight support at 1101.5.

I was looking to go short at around the 1107.5 resistance level. However, price and stochastic was showing divergence at the 1106.5 level and I scaled in 2 contracts: 1st at 1105.5 and the 2nd at 1106. I then scaled out at 0.75 and 2 points respectively.

Given it was my first trading night of the week I decided not to trade the cash session and keep the account ticking over.

Systematic Approach to Obtaining Option Premium

Further to my recent post on selling Naked Puts I have put together a quick flowchart to illustrate the possible way to generate monthly income while limiting market exposure.

Now I carry out this systematic approach in the US for the reasons stated previously in http://grahamthomsondiary.blogspot.com/2009/11/option-strategy-naked-put.html but here I have given the example as Woodside petroleum on the ASX.

Friday Diary - Nothing to Report

I took Friday night off trading - resume next week.

Thursdays Diary - Reasonable Performance

Last night I acted on a solid couple of reads my only regret being (once again) not capitalising on the fade on the 1 minute extreme - see below:-

I use the time based charts to get a bigger picture ( 1 min, 5 min, 30 min, 60 min) and determine my market bias at any given time. The 1 minute chart at around 9am (US central time) was at the Bolinger band extreme and exhibited 'white space' between price and the blue moving averages.

The good thing is I picked this and I entered at a good price at around 1100 - fading the market extension. However at this point I had a $100 (from 2 previous set-ups - see below) in the account already and got twitchy and got out too early for a measly tick or so.

That said I am not too disappointed because the day is getting closer when I will have the conviction to go 'all-in' on these set-ups.

Option Strategy - Naked Put

Since my trading of the SP futures this week has been light I thought I would present an example of an option trading strategy that I use.

I trade US options - only because the market is bigger and with that brings liquidity, tighter spreads, and increased opportunities. That said this strategy can be employed with Australian options however the contract size is larger - 1000 shares versus 100 shares in the US.

Selling a Put Naked (oo err, tee hee)?

Put selling is designed to complement a trading portfolio because it offers two methods for generating profits: collecting premium by selling an Out-of-the-Money option and/or acquiring a stock at a reduced price.

So in my case I choose fundamentally strong companies that exhibit the potential for future growth. I then sell out of the money puts at a strike price that I believe is at a wholesale price i.e. at a price where I would be willing to accumulate the stock where I would then consider selling out of the money calls viz. covered call(that's a topic for another day).

Let's look at the example of AT&T

Given the strong fundamentals here is my technical analysis/observation:-

• price is at historical lows
• price has found some recent support at the 25 level with a second support level at 23.5
• price has bounced of the 25 at least 4 times confirming the support
• price has broke below 25 but found support at 23.5 and reconfirmed support at 25
• price has bounced to the 26.5 level at least 5 times - i.e. people have made at least 5%

Now with a traders hat on:-

• would I be willing to accumulate the stock at 23-24 level - yes.
• are the premiums at 24 strike worth the risk - yes.
• what is my break even - 24-0.28 = 23.7 (Dec 24 strike) and is this close to the secondary support level - yes (ideally it would be below this level)

I am currently holding short -10 T Dec 24 Puts at $0.28. In other words I have sold 10 December AT&T put options at a strike price of 24.00. I have sold the right but not the obligation to buy AT&T stock at $24.

What if? How could it play out?

1. stock shoots up above current resistance - the put price will be worthless I can either buy it back to close the position early at a nominal price or i can wait until expiration (December 18) and collect the full premium of $280 (10 x 100 x $0.28).
2. stock stays above 24 but within current trading range - wait until expiration (December 18) and collect the full premium of $280 (10 x 100 x $0.28) then write (sell) the next month out (January) put option.
3. stock breaks below 24 - the option will be exercised at expiration and I will hold 1000 AT&T stock at a cost of $24. I can then sell call options against this stock and gain monthly premium (covered call)

Ideally price remains in current trading range and monthly puts are sold against this premise. More on how it plays out later.

Wednesday Notes - Nothing to Report

Didn't trade last night - US holiday, lighter volume; Mash brewery in Swan Valley with a few of the lads instead.

Tuesday Diary - Missed Opportunities

I know we all have read the cliche that trading consistently for profit is 10% system/edge and 90% psychology. Well once again last night I proved this adage.

As I said yesterday the SP future contract has a tendency to oscillate between previous late day support resistance if the day had a strong trend. It played out again - I however missed the early opportunity to buy the dips at price support of 1087.5 - see attached support resistance chart - i use 610 tick. This was around 5.30pm in Perth - feeding time at the zoo!


I did position myself at the test of this price support within 1 hour of the market open.

I did note with interest the bear trap set-up following the moving average down - this is what messed with my head! On market open I got freaked with the fluctuations despite the trade basis being unchanged and got out with a meagre profit as price faltered prior to the moving average crossover.

This set-up should be my bread and butter and requires to be capitalised on. With this set-back I traded very little for the rest of the morning - one probe short that I sensed was going North - and scratched with + 1 tick.

As the subject reads - missed opportunity - $50 lunch money should have been a couple of hundred dollar feed.

Monday Diary - Solid Monday Opening

With three young boys the late evening trading the SP can be a little challenging. Monday was one of these nights as my 3 year old son had disturbed our sleep. However, with the European showing some strength for the bulls my initial read and market bias played out as I expected and I retired with $200 in the account after 15 minutes.

My read was as follows:-

• strong European bullish session
• potential support from pre-market price at 1073-74 area
• SP higher time frame 30 mins at 21 EMA support
• SP potentially pushing towards previous highs at 1100
• bull trap setting up in hour before cash market open

Based on this I implemented the following:-

• bought 1 contract at price consolidation and stochastic/MACD versus price divergence at 1050
• bought 2nd contract at 1074.75 on further oscillator divergence with price
• final contract on confirmation of consolidation break at 1075.50 (used stop limit order)

I then scaled out 8 ticks, 5ticks, 4ticks. I called it a day at this point but there was good money to make buying the dips in early session.

Looking forward to the tendency for big price range swings on day after strong trend. Check out the early evening (european session) action.

Friday Diary

Took the night off last night - went to Jazz Cellar, mt Hawthorn. Surprisingly good.

Thursday Notes

Didn't trade last night - had a work function.

Wednesday Notes - ES FOMC Day Tendency

Well what can I say the S&P emini tendency to perform a reasonable up move leading into the FOMC announcement played out again last night. Once again as I am in the Southern Hemisphere I write my journal notes the 'morning after the night before' as it were.

That said I didn't play the sequences with much conviction. I finished 1.25 points up - about $40 after commissions - lunch money for the week! The third sequence really got me annoyed with my actions - break out of a consolidation range and pullback to previous significant high at 1052, support at moving average, candlestick pattern, hidden divergence on the stochastic - high probability in my book. However, I played it really poorly.

Now this is not an exact science so my first contract was filled at 1053.25. Not a great fill but hey the basis of my entry was still intact. I panicked and took a 1 tick loss as I watched the picket fence construct for a few bars - why didn't I have conviction in the set-up despite evidence to the contrary?

• Was late on the entry and then believed I got a poor price - I actually hesitated on the trigger.
• Was fearful of finishing the session in the red and was protecting my modest profit.
• Weary - still trying to adjust to the later time slot with US daylight saving ending.

What should I have done:-

• Accepted this game is not exact.
• Scaled in two more contracts as the trade basis held - at a better price.
• Scaled out contracts as trade went in the anticipated direction.

Yet another school day for me.

Tuesdays Notes - Head Above Water

Today was another example of why this game isn't as easy as sellers of the Holy Grail would have you believe. They forget to highlight the internal battle of trader psychology, personal traits, human tendencies, fear, greed - take your pick.

After taking a pretty low probability set-up (of course only defined as such in hindsight) thankfully on a single contract short at 1034.75 I managed to claw back into positive territory by midnight local time.









The positive thing is that in the past if I had taken a hit so early in the play I would have subsequently traded irrationally and tried to get back at the market - reversing without basis, adding to losing positions etc. However, what I did was scratched the originally entry for -2 points on 1 contract, dusted myself down, and then scaled in 2 contracts short at a level of higher probability; Overnight resistance at 1038.75 Mean Pivot, 1 min chart off the 21 period, volume charts at MA resistance. Took 1 point just prior to news breaking 10am exchange time.






I then waited patiently for one more sequence set-up:

• at the 1035 -37 level and played it pretty poorly. Didn't let 2nd contract run!

However Harry Hindsight did help me find another couple of missed opportunities - purple arrows.

Another positive day, reasonable focus but as usual room for improvement. These types of days are a reminder that in this game when the recognised patterns set-up and present themselves it is essential to push hard to make up for all the other sporadic slack and sloppy entries/exits.

FOMC announcement tomorrow afternoon US time - will be playing the morning session very cautiously. Tendency for bullish trend in morning?

Monday Diary - Leaving Money on the Table

After the trending market south during Fridays cash session I looked forward to Monday. Why? Recent market patterns have shown a tendency for decent oscillation between prior (trend) day support and resistance. These oscillations begin in the pre-market at the commencement of the European session.

Since I am in the Southern Hemisphere (Perth, Australia) I can sometimes make myself available during this time. That is after I finish the day job (Engineer) and assist with feeding our three boys.

So that said I took a short position at around the 1040 resistance on stochastic divergence - my concern was the ascending wedge that was forming and therefore I nervously took 2 ticks - where was my conviction in this high probability set-up? The market stretched some 2+ points south in the first push down!

I then settled down half an hour prior to the morning US cash session at 10pm (AWST) with my expectations of early session oscillations around previous day support/resistance. With my bias and plan set in my mind - position long as ES approaches the 1033 support area - I prepared myself.

This trader is sometimes off the mark a little on a Monday - today was no exception. I positioned my first contract at 1037.5 on stochastic divergence - a little too eagerly given my pre-market plan. However, with the trade premise still intact I stretched my stop below the 1033 support area and scaled in 4 more contracts as price held around 1033.

Talk about rusty for a Monday! The high probability set-up didn't fail me and headed north. I took 3 contracts off the table prematurely +2 ticks. The remaining 2 at +1 point. And what happened next? The market spiked up to the previous resistance at around 1040.

My lesson today - hold conviction in the ES high probability set-ups:-

• scale in at predefined bias - support/resistance levels.


• hang on for 1.5 to 2 point clip on first set of contracts


• let remaining position run to predefined support/resistance or on fading price action
  
  

Yes it was a positive day +$160 in the account but on days like these it is essential to push hard - lost opportunity? yes - how much? probably +$500.

I retired weary at around midnight (local time) satisfied that I picked the bias but frustrated I didn't maximise the opportunities.

Until tomorrow.