Detailing my process for planning and executing a day trade on NASDAQ Futures.
Overview: Since the FOMC meeting on Wednesday (today is Friday 12-20-24), stocks have been under intense pressure. The NASDAQ experienced a throw-up-in-your-mouth red day like we haven’t seen for quite some time on Wednesday and more red yesterday (Thursday).
When you see a nasty red day like this in the NASDAQ or S&P, “generally” there will be an equally violent reaction in the opposite direction at some point fairly quickly.
This is inherent with the indexes. They will puke for a day or two, then they need to spring back to relieve the pressure. This will either allow sellers to unload again at more favorable prices, or the momentum back up just bulldozes everything in sight and it reclaims new swing highs in short order.
So when the indexes jump out of the window for a few days, my first thought is “this is great where might it stop first”. These entry spots are good risk to reward locations. (Note *1 read more on this below)
These are places where smart bear traders are looking to cover their positions. These are also usually places where investors are looking to add some exposure….”buy the effing dip” as they say.
So when you can identify these places in advance it will give you confidence when the time comes to execute. Doing this also releases you from the fear of missing out (FOMO) and all other psychological issues. (*2 more on this below)
I will never come to the screen and initiate a trade “just because” something looks good at the moment. I am a holistic trader. I believe in the power of looking at the big picture. The proverbial “I want to see the whole forest, not just one tree”. This is easier if you trade the same product each and every day like some traders do. (*3 read more on this below)
So I’ll analyze everything from the top down, even if it’s a day trade. I want every possible probability to be on my side at the time of execution.
So let’s take a look at the NASDAQ futures on some higher time frames and see what we can see.
First off….a quick housekeeping note. My futures charts are always continuous and back adjusted. I once heard a Market Wizard talk about how this was like futures blasphemy. My answer to this is, I’m sure he’s right. He’s a Market Wizard, and I’m a nobody. But this works for me.
Here are my Sierra settings:
OK…let’s get into it. Starting with the weekly chart.
The “gimme” trades are always the first back-test of a higher time frame break out.
Trading is not rocket science.
It’s risk and probabilities.
Match your risk to the probability of your trading system over a large sample set and you’ll make money.
Simple as that.
Don’t complicate things that don’t need complicated.
Looking at this weekly chart, I identify a nice clean breakout. Red line on the chart below.
Then I look at it to see where the back test area might be. Again, it’s not rocket science. The #1 green arrow points to the spot where they will likely try to support it should it decide to come back.
And that’s what they did. The #2 green arrow shows a weekly wick coming down to test with near needle-threading precision, to test the #1 high and then bounce.
That would have been the first great spot to catch some points, but that was last week, so let’s keep rolling.
These large time frame breakout will usually hold for several tests before the floor drops out. This excludes news events etc. (like FOMC meetings)
Quick note on looking for asymmetrical reward to risk trade locations.
When you initiate a trade whether long or short, think to yourself something like this:
“If I’m going to buy here, will there be other buyers still buying it higher after I buy?”
“If I’m going to short here, will there be more sellers to sell it lower after I sell?”
This should permeate your brain in everything you do. It should radiate down to your clicking finger right before you click buy or sell.
If I’m going to buy I want to be buying when the probabilities are on my side.
I want to identify places where:
- There will be a mass exodus of shorts who are covering at a target. They are BUYING to cover.
- New buyers who are buying the effing dip. They are NEW BUYERS.
- New shorts who are shorting and continuing to short because “it’s gotta keep going down”. They are adding fuel because they keep having to buy it HIGHER to cover their new shorts.
Let’s continue looking at the weekly chart. If that breakout fails, where will they look to go to next?
If the first back test fails, I’ll go to the next break out that the price will most likely stop and reverse, or at the very least “pause” at.
Green arrow #1 shows where the next breakout point looking directly to the left would be. Remember, this is not rocket science. This is probabilities…and the probabilities suggest that there will be smart buyers waiting there and smart shorts looking to cover there.
Green arrow #2 shows today’s low. Coincidence? Maybe.
But, was it probable? Yes.
So now that we’ve defined some good areas on the weekly chart, let’s move down to the daily.
This daily chart is a master class on how we don’t need too many tools in trading.
Green arrow #1 shows the same weekly level from above, overlaid on this daily chart.
Green arrow #2 shows the absolute perfection on the back test. Patient buyers were waiting, and smart shorts covered there too. This is jet FUEL to go up.
Green arrow #3 shows a daily break out level. This will be important if the first break out fails. It did, after FOMC on Wednesday.
Green arrow #4 shows traders back testing this daily break out level. As we can see from the chart, there were buyers there waiting, and there were certainly smart shorts covering their positions there.
Green arrow #5 shows the weekly chart breakout from above.
These are the areas that I will stalk and watch for things to set up. If you don’t plan like this, you’ll vacillate endlessly going long and short. You’ll paper cut yourself to an absolute brutal death. Trust me…I can teach that class.
So now let’s start going down to the lower time frames to see if there’s any structure forming or is it just a wild west show.
The NASDAQ futures are incredibly precise. The chart below shows the absolute precision of price action relative to the levels that we predefined ahead of time.
Let’s get into it:
Green arrow #1. This is the first weekly break out level that we identified first. It got tested once so it’s under warning of failing.
Green arrow #2. See the nasty Aggression bar (custom coded in Sierra) that just sliced right through it. Sellers were very keen on destroying any interest in that level.
Green arrow #3. Where did smart sellers cover and price conscious buyers buy? Right at the daily breakout back test that we defined in the chart above. Should I say it again? This is not rocket science.
Green arrow #4. Price then found some structure. Creating this channel. Examine it closely. Sellers tried to get Aggressive and break it down. Buyers held it and pushed it up to back test the weekly level overhead.
Green arrow #5. The weekly level that got back tested from the under side. Look at the Aggression bars when it tested that level. Aggressive FOMOers were buying it right at the very worst price location. While smart shorts were selling into them. Creating multiple Aggression bars. Then….BAM…it fell apart…with Aggression. It sliced through the channel structure with the Aggression bar.
Green arrow #6. Price formed an Aggression bar right into the old daily break out level again. Smart shorts are covering some here, as well as price conscious buyers seeing if this level will hold.
Green arrow #7.Tried to bounce and found no interest so down it goes. Note the Aggression bar on the break down.
Green arrow #8. Price is starting to create some kind of recognizable structure. This time in another channel. Great. Now we have something to monitor.
Green arrow #9. Price made it all the way down to the weekly break out back test that we marked from above. With almost absolute precision. It tried to break down with Aggression and then started to reverse. The presence of this last aggression bar is significant. Significant because it was less aggressive than the previous Aggression bars. Noted by not being white or yellow (these are just what I’ve chosen to help me identify the strength of the move). These bars indicate volume and speed of the move relative to a look back period. Yellow is severe Aggressiveness. White is less severe Aggressiveness and so on.
Green arrow #10. Break out of the channel with an Aggression bar. Enter position here. Short term structure broke at a large time frame inflection point. The risk to reward here is in the long traders favor.
These kinds of trade locations, when you pair a large time frame point of interest along with a smaller-time-frame-structure-break-out-point are the asymmetrical locations we as traders have to identify. And this is the kind of work that is needed to identify them.
What did we have at the exact point where green arrow #10 is?
- We had a large time frame area of interest.
- An area where smart shorts will likely be covering and taking profits.
- We have a level where patient buy-the-dip traders and investors will be looking for value.
- Next we have some kind of structure on a smaller time frame that we can break out of.
- Basically, we have probabilities on our side.
Green arrow #11. As a day trade, this is the first spot to unload some of your risk. This is the next significant level above. The daily break out level that failed previously.
Green arrow #12. As a day trade, this is the second spot to unload some more of your risk. This is the next significant level above. The previous weekly breakout that failed. We don’t know what price will do, so we have to lock in profits along the way. All your dreams of Lambo’s and private islands need to be flushed from your mind. Have a plan, trade your plan. Buy cool things later.
After scaling again at green arrow #12, keep the last portion of your trade for a swing. The real money is holding overnight and adding to the position if more structure shows up in a good risk to reward location.
That’s it for now. I hope this was helpful. If you have questions, please comment below or send me an email to [email protected]. Thanks for reading.
Notes and Nuances:
*1
In all of my trading, having a good trade location is imperative. But these trade locations can look very much the opposite for day trading and swing / trend following. In day trading, I want to be closest to the areas where my trade will be invalidated.
In swing trading I want to buy strength and give my positions a lot of room to breathe.
If you see my swing trade executions on a daily chart, it’s obvious I’m buying higher as the price goes up. If you look at my day trade executions on a daily chart, you’d think I was a value buyer. For me, this is the kind of mentality that it takes to make it in both worlds.
*2
For vast amounts of time in my trader career, I had emotional issues.
Now, in general, I think that trading psychology issues is just pure bullsh*t. I realize that will get me into trouble with a lot of traders. Here is why I think the way I do.
In trading we must accept risk. If you don’t accept risk…don’t trade…you’ll be an emotional wreck.
In trading we must know probabilities. If you don’t know the probabilities that’s OK…create the statistics of your trade system so you know your probabilities. Confidence in your trade system will (should) leave you emotionless.
In trading we must know how we make money? What do you do in the market to withdraw money? What is your system?
If you have all three of those defined…there should be zero emotion. The trade works…or it does not. If it works…good…move on to the next one. If it does not work…good….move on to the next trade.
Think in sample sizes of 1000 trades, not 1. A single loss as part of a sample of one-thousand should be meaningless to you.
Emotions are bullsh*t. When you get emotional…it’s a sign that one of the above is not in alignment with you.
*3
There are great traders out there who trade the same thing each and every day. Many of them are probably very rich. I don’t have an issue with that. But that’s not how I trade. In my work, I don’t ascribe to there being asymmetrical reward to risk each and every day on the same product.
There is something to be said for learning how a single product like the S&P or Nasdaq futures move, learning their nuances etc. I did this for a long time too. But, for most, it’s a short road to a very tall cliff. Everyone has their way of extracting money from the markets, and how ever you make it your own is good with me.
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