How Trading Really Works

On Thursday night, I did my usual homework routine.  My conclusion of the markets for the next day (Friday) was that the odds favored a move lower.  I based this in part on what looked like initial shortening of the thrust in the Russell 2000 futures and the fact that each of the major indices had rallied into the middle of the last congestion area before supply hit the market. 

In my post that evening, I laid out the levels (1300 and then 1296) to which I thought the market could fall.  Though my “bias” and morning game plan was to trade to the short side, I also had a “Plan B.”  I said,  “Should the mar­ket decide it wants to con­tinue higher, the next lev­els of resis­tance would be found at last night’s Globex highs of 1314, then the 1320 and then 1327 levels.”

I have learned over the years that (A) it is vitally important to have a game plan for the following morning, and (B) it doesn’t always work out as you think it might, so you better also anticipate what else can happen — in other words, always have a Plan B.

You can see on the 5-minute chart that the market was having difficulty breaking down below yesterday’s high.  Although it dipped below 1306.75, we see buying come in on each dip at A and B.  On bar C, the market again tries to go lower, but volume is much lighter, signaling that supply has dried up.  Buyers now rally the market up on D.  Rather than holding onto a short bias, a long postion was called for as the market rallied up above yesterday’s high.  Another spot to take a long trade was at E where the market pauses briefly after making a new high on good volume. 

The rally runs to the Globex high identified as a potentail resistance level the night before.  Here, the market does meet resistance (F) and sells off for the remainder of the afternoon.

Part of the skill set needed for trading is mental flexibility.  We have to be able and ready to change our outlook when the market tells us it is doing something different than expected.  This is why I strive to anticipate what the market is likely to do rather than predict what the market will do.  Prediction is rigid; anticipation allows for flexibility.  Being mindful of what the market is doing in the present moment rather than clinging to a bias will allow you to trade with the flow of the market.