MARKET PERSONALITY- different market conditions

Thanks to Bobh from the Nqoos Yahoo group for this great post showing the value of cultivating the sense to determine Market Personality in order to maximize your profitability...NQoos

OK, here goes. I picked a day on bonds about a week or so ago because it's an excellent example of the different types of markets I tried to describe earlier - and also the transition from one type to another and why we need to be able to adapt. There are 4 charts attached and I'm going to walk you through how we traded them (or didn't) and why.

First I want to make a general comment though. Over the years I've gotten pretty good at avoiding bad markets and very good at capitalizing on good ones. But it wasn't that long ago when I was absolutely great at getting chopped up in bad markets and then missing most/all of the move that ensued when it finally broke out of the congestion (usually because I lost the will to trade after getting chopped up). Point being - this is something that ANYONE can learn how to do because there's nothing special about me or anything that I'm doing.

Chart1--As you can see bonds had a Very lackluster start to this day as they did nothing but churn for almost 4 hours after the Open. This is unusual for bonds/notes but it happens. However, for those of you who watch the ES primarily or exclusively, this chart should look intimately familiar because it's normally all the indexes do on any given day.

For me this market environment falls into the "Time to play poker" category (it's a close call though) because trading inside ranges is not part of my game plan. And while I understand how to trade this kind of stuff it's more important to me to maintain my discipline and avoid it versus trying to scalp a few ticks. Having said all that, this can be a very profitable type of market for those who like to trade ranges. And if I were to trade it my game plan would be to look for sells near the top/buys near the bottom, I'd trade smaller size, and I would look to close the entire position somewhere near the other end of the range or at a predetermined profit objective. It's not a market to get greedy in because any gains you manage to get can very abruptly turn into a loss. click chart to enlarge

Chart2- where things "could" start to get very interesting because after 4 hours of ping pong the market finally poked its head above the top of the range. This is going to resolve one of two ways now - either it's a head fake and we'll drop right back into the muck (and probably through the bottom of the range), or something has just changed dramatically and a good up move is about to follow.

Obviously this breakout was real or there wouldn't be a story. And it actually setup nicely so you could be long already, but let's assume we're still flat. In my early days my thinking would have been that I already missed the move and would be very unsure of what to do next (besides use bad language). But that couldn't be more wrong and what to look for next is really quite simple (as is everything in trading). If you miss the move out of congestion, which is very easy to do, then you just wait to see if they can consolidate the breakout. In this case (and it varies a little depending on the congestion pattern) that means can the bulls hold the top of the range as support. If they can then the bears are going to tuck their tails between their legs and go into full retreat mode and we are going to get a very nice move - and a great place to enter. click chart to enlarge

Chart3- which clearly shows them holding the top of the range as support and providing a great entry. Now it's party time for the bulls and we should finally have a market...so what should our strategy be in regards to trade management? Well, we've just spent 4 hours doing nothing which I view as storing up energy for a big move. We've consolidated the breakout and are poised to make a big run, so the best course to me in this situation is to get very aggressive....larger size, trailing stops, take partials and look to add them back....and do this until the market tells you to stop. click chart to enlarge

Chart 4 - What can you say about other than it's great when a plan comes together because it doesn't happen often enough. The trade worked great and regardless of what method you used to trail a stop it should have kept you in the entire move. And there was a chance for an add-on or two if you didn't think it was too high to buy. click chart to enlarge

A few points in closing.

First, I haven't talked about any changes in methods, they never change - only changes in how to use the market environment to help determine how to manage a trade.

Second, you don't need squiggliest or other toys to make these decisions - PRICE tells you everything you need to know.

Third, and as I mentioned previously, if you want to trade intraday then you have to put in the screen time to develop the ability to recognize the different environments that the markets throw at us. Fourth, once you get proficient at that you can then save your emotional capital for those times when the market really wants to play.

And finally, this is a fairly typical day and you can clearly see how a one-size-fits-all approach is not the best strategy. If you tried to "trade" or be aggressive the entire day then you would likely have gotten chopped up during the 4 hour range but did well on the breakout/trend (if you took the trades). If you tried to scalp the entire day then you would have done OK inside the range but only have gotten a small piece or two of the big move best case - worst case you could have gotten chopped up trying to sell it if you didn't "see" the transition. And then at the end of the day you would be questioning your "methodology" because neither approach worked well if at all.

Hope this post proves useful for some of you. This is really not a methodology issue but one of how/when to apply them.

Bob