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The big market moves of Wednesday and
today are a great illustration of how deceptively easy the market
appears along with the potential for stellar gains and/or losses.
The
chart above is ES market activity for Tuesday, Wednesday, and Thursday
of this week. I included Tuesday to show you a typical trading range
for the market - about 15 - 17 points in a day. The market moves on
Wednesday and Today were more than double that with a 40+ point range -
giant moves!!
Viewing the
completed chart makes it look fairly orderly and straight forward-
market drifts, then dives sharply, then recovers. You might even be
tempted to think the movement looks pretty predictable and easy to
forecast. Ah, but things aren't as easy as they appear. Cover up the 3/4
of the right side of the chart, and slowly move the paper to the right,
and try to predict where the market is headed. Not as easy or
predictable now, is it? =) That's what traders face trading real-time -
trying to gauge where the market is headed with only past data/charts as
a reference/guide. They key to being successful is trying to map out in
one's head what the "end of day" chart looks like long before it
actually takes shape on the chart.
The majority of traders were fooled by the Wed/Thurs big swings. These are people who are seasoned traders, not beginners.
Before
I describe the events on the chart, I need to define two terms. The ES
futures market runs nearly 24 hours/day and is composed of two parts:
1) Cash ("Live") Market - This is the time floor traders at the exchange actively trade the market, 9:30am - 4:15pm EST.
2)
Globex Market - The time outside of Cash Market hours - from the
afternoon through the next morning until the Cash Market reopens.
Okay,
so looking at the chart, Tuesday was a normal day and ended down.
During the Globex session, the market rose slowly but steadily. Then we
get to the Cash Open on Wednesday, and the market starts moving down.
During this time all the Twitter message traffic shows traders are going
long, buying as the market is dropping, thinking that the market is
going to resume moving up. The market keeps drifting lower, but people
still keep buying. At this time there is hardly anyone mentioning going
short (selling).
As the
chart shows, the market was basically a one way trip down and those who
bought now had to get rid of their positions with losses, then they
would buy in again at a lower level, only to exit that position with
losses as well. They never considered reversing and going short instead.
Some who bought at the
start of the day and held their position, starting feeling lots of pain
later in the day with mounting losses until finally, they close their
position with a big loss. This is why you should use stop loss orders to
keep small losses from becoming big losses. Unfortunately traders
including me don't like using stops because the market tends to seek
them out before continuing in the planned direction. But big market
moves like on Wednesday/Thursday show why not using stops poses such a
big risk.
So the cash
market closes and continues to drop during Globex before slowly starting
to rise before Thursday's cash open. At this point Bulls are very
jittery and Bears are licking their chops to short more when the market
moves up. A lot of the same people who were trying to "buy the dip" on
Wednesday are now shorting the market rally, expecting it to fall back
down. As the really continues, they exit with losses, and short again
higher, only to close with losses as the market moves higher. The
Twitter traffic is the reverse from the day before - lots of people
selling, very few buyers. Instead of reversing their mindset to buy,
they keep selling. Towards the end of the day the market climbs at a
faster pace, giving enough pain to sellers to force them to close, which
adds pressure for other sellers to close, otherwise known as a "short
squeeze". The market zooms up and makes up all the ground it lost the
day before, as if Wednesday never happened.
Summary:
Wednesday:
Market falls but majority is tricked to thinking it will go up and wind
up losing. Bears are giddy with delight, and think market will be
falling further the next day.
Thursday:
Market roars back, but the folks who lost money on Wednesday are not
likely participating because they are too nervous and wounded. The Bears
who stayed in thinking the market would keep falling lost all their
profit. New Bears who shorted today and stayed in lost their shirts with
big losses.
You
should find it fascinating that so many seasoned traders were tricked
into doing the opposite of what they should be doing. This is what makes
trading difficult - the market send out signals that are meant to
confuse the majority of traders, despite their preparation.
How
did I do? Well, I successfully got the bulk of Wednesday's down move,
but even though I expected Thursday to be an up day, I got left watching
since it never pulled back to what I was expecting as a low risk entry
point. I can live with that, and I'm all kinds of glad I wasn't lured
into trying to short this market today...it was a beast in the up
direction!
In
terms of the potential gains or losses made by traders - they were
amplified by the big size of the swings: a 40+ point range! So for
example, 1 ES contract gives you a $50 gain/loss with every point move
up or down respectively. So a 40 point swing represents a $2000
gain/loss depending if the trader had a winning or losing trade- and
that's just 1 contract. So you can see if a trader had many contracts
and was wrong, things could get ugly fast.
In
a worst case scenario a trader would be long on Wednesday and stay
long, getting big losses. Then they would try shorting the market
Thursday and wind up with huge losses again. The size of these swings
could easily break an account - which is the risk all traders face. On
the other hand, the trader who is on the right side can get tremendous
gains. Therein lies the risk and reward of trading. It's not easy, you
can lose big if not careful, but the potential is also there to make
life changing wealth.
1 comment:
I am more passionate about trading and thus I want to start giving my own targets instead of using intraday SGX signals given by one of broker and should be independent.
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