In the case of the EMini S&P, Monday was an inside day with range contraction (Monday’s range was 43% of the Friday range) and it was roughly a doji bar. This combination of patterns indicated a lack of directional movement, which was likely to resolve itself in a large move up or down on Tuesday.
The previous day high and low are the standard reference prices for a breakout trade- we look to go long if the market trades above the previous day high or we short it when it breaks below the previous day low. However, I prefer to wait to take EMini trades after the 8:30 AM stock market open, and the break of Monday’s low occurred around 5 AM this morning.
So although we missed the primary short entry today, we look for the market to trend lower over the course of the session, so we can look for other setups to short the market. In this morning’s STI watch list (HERE) I highlighted resistance in the 2062.00 area; we could use this level as a reference price for a short this morning.
I labeled 2062.00 as resistance as it was a swing high made around 7:50 AM; it was also roughly a 50% retracement of the most recent intraday downswing. We could use this area as a reference price to ascertain whether the market was likely to continue a recovery rally or whether the breakout downtrend would resume.
The 8:30 AM was right around 2062.00, it then made a day session high of 2062.75 before turning down. The move back under 2062.00 was our trigger for a short sale. The initial stop loss could go above the last premarket high of 2063.00 or above the Monday low of 2066.00.
The market sold off after the open, making a session low of 2051.25 around 9:35. Traders looking for a quick play could cover in this area as the market reversed course and rallied.
As it turned out, I was tied up when the low was made and I didn’t have the opportunity to cover, so I chose to stay short, looking for another leg down. After making a lower high of 2061.00 around 10:20, the selloff resumed, eventually making a new session low of 2047.50 around 11:30. I’m now out of the trade; if I were inclined to trade again I would watch the 2051.00
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In this guide, experienced trader and broker Scott Hoffman explains the trading methods he uses to analyze and trade the futures markets and to publish his trade advisory, Swing Trader’s Insight.
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
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