By Jim Wyckoff
The S&P 500 futures market is a trading arena unto itself, which can accommodate many different trading styles, according to Linda Bradford Raschke, a well known trader, lecturer and president of LBR Group, Inc.
âNot only does this market display a different daily profile than the other futures markets, but it has a much longer âlength of lineâ (intraday swings), which offers more trading opportunities, she said. âAdditionally, there is a wealth of information provided by many internal indicators on the equities market that some professionals like to monitor.â
Raschke is a featured speaker this weekend at the 20th annual Technical Analysis Group (TAG 20) Conference here, sponsored by Telerate Seminars.
Below, the longtime trader provides some tips on trying to be a successful S&P 500 day trader. âHowever, let me also say that the majority of the professional S&P day traders I know tend to specialize in just one pattern or trade just one style. This is definitely a market where overtrading can be a temptation.â
âSWING TRADINGâ CONCEPTS
The principles of âswing-tradingâ involve applying basic technical analysis to the secondary fluctuations which occur in a market, said Raschke. âWe can apply these principles to all timeframes and all markets, but they work particularly well with the S&Ps, so a brief summary is first in order.â
Swing trading is following the price action and learning to anticipate the marketâs most probable course of action. âWe learn to determine the immediate trend by observing whether upswings are greater or lesser than downswings. In a simplified model, we look to enter on retracements in the direction of the trend. An early sign of a trend reversal is a âtestâ of a most recent extreme price level which usually forms a higher low (or lower high).â
A trend reversal is confirmed when the upswing leg exceeds the length of the downswing (or vice versa). If a trader enters a position on a âtestâ looking for a trend reversal, but does not get this confirmation, he should exit the trade or pull his stop up close to his entry price, said Raschke.
There are also periods of market rest, consolidation or low-volatility range contractions. These patterns provide an opportunity for traders who like to trade âvolatility breakoutsâ–a methodology in which one waits for the market to tip its hand with a powerful thrust and then jumps on board in the direction of the movement. âThis too, can be a form of swing trading, as we are playing only for the marketâs next immediate move and not making any longer-term valuation judgments.â
âWhen a trader practices the principles of swing trading, he learns to develop a conceptual roadmap in his head. In the S&P market, it is particularly important to learn to think in terms of concepts because there can be so much distracting intraday noise.â
Some more examples of concepts, in S&P 500 trading, are: mid-morning trends tend to carry into 11 a.m. Central Time, plus or minus 15 minutes. The best average intraday trends tend to last 45 to 90 minutes before having a countertrend reaction. The earlier a trend starts, the earlier it âpeters out.â There is often an opportunity to play off a reversal of the move into 9 a.m. Central Time, plus or minus 15 minutes. The markets tend to be more emotional at the beginning of the day, when a good move counter to the initial opening swing can occur.
âIf you learn to think in terms of concepts, you can master the markets instead of becoming a slave to the charts,â said Raschke.
TIME-OF-DAY TIPS
On average, there are only two to three âgreatâ S&P 500 intraday âlegsâ or swings, said Raschke. âMost professionals catch only three or four really great trades a week, if that. Most trades will often be very small wins and losses. So donât be too harsh on yourself if you feel that you are missing the majority of the movement. Overtrading suckers one into seeing only the trees and missing the forest.â
Traders tend to be creatures of habit, and thus it is easy to compile market tendancy charts. There are several key patterns which have held constant over time, she said. âOne common pattern might be the market rallies or sells off into noontime. At this point, a large percentage of the floor traders and brokers in New York go to lunch and a countertrend correction begins. When the late stragglers get back from lunch, the morning direction tries to reassert itself again.
âIf the afternoon rally or sell-off starts too soon, it wonât be able to sustain itself through the end of the day. It will die out around the bond close. However, if there is an afternoon âshakeoutâ, usually between 1-1:30 p.m. Central Time, then the market can finish in a trend mode into the close.â
Raschke said not to fade a move into the last hour of the day, âfor there is no time to exit gracefully if wrong. The odds suggest a better entry price the next day on the probable morning follow-through. Moves on Friday tend to end at 2 p.m., not 3 p.m. Central Time, as too many traders prefer to flatten out or even up before the weekend.
âOn many days there occurs what I call the 2 oâclock jiggle. Right around the time the bonds close, there is a great 10-15 minute scalp trade. I believe it occurs as an emotional reaction to how the bonds go out. The trade usually lasts for no more than 10 to 20 minutes, but is fun to anticipate.â
Sometimes a good selling opportunity occurs around 1 p.m. Central, she said. âIn fact, it is amazing how many good turning points occur on hourly readings, for example, 9:00, 11:00, 12:00. It think this is because people are more conscious of time at these moments, creating a slightly sobering effect.â
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