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The Trend is Your Friend. Or is it?

You’ve read it all before. Follow the trend. It’s your friend. The question is, how accurate is that statement really? In terms of day trading, it’s a double-edged sword. In equities as well as futures, the trend is hard to fight when you have a massive sell off or massive spike in the market. It’s a no-brainer. However on a typical day with average to above average volatility you can expect some swings and reversals. Especially early in the trading session. The beauty is that you don’t need a secret formula or that one magic indicator to figure that out. Think in terms of an airplane. As crazy as that sounds it won’t fly forever. It will come down. The question is when. When I trade futures or options I’m looking for sudden extremes whether they be on the buy side or sell side.

In terms of price action, I always look at momentum. Are there more buyers coming in? Or are the sellers taking over. There will be a high and low established within the first 15 minutes of the trading day and based on that I will watch my momentum indicators and scope out peaks in momentum. I look to play the contrarian trade and capture the quick reversal. Of course, that trade might not be a homerun.

The key here is quick reversals and look for those singles and doubles. It adds up trust me. Case in point I was trading the S&P minis and was looking at oversold conditions. My indicators hit and at 2288.00 I entered my position. Shortly after just hovering a quarter point below or above that level I saw a jump to 2288.75. I sold off and took that quick profit. I did this about 4 times in the session and nicely profited 450 dollars.

I can’t complain about those numbers for 3 hours’ worth of work. The key thing to realize here is we aren’t looking for reversals to start a new trend. We are looking to find inefficiencies in an overworked trend and a tipping point in order flow. By order flow I mean who is losing momentum. Buyers or sellers? You will always bounce off a low or high.

Here is the beauty in this strategy as well. Morning to mid-morning trading can create huge drops or spikes. This is caused by pre-market inefficiencies and market makers having some fun which we will go into in another article! Now for example when we look at a big drop and our momentum indicators are pointing at extremely sold off levels and volume as spiked then sellers are coming in and having a field day. Or are they? Don’t be sucked into following the heard. You know the saying the house always wins. Well, that didn’t stay in Vegas. It made its way to Wall Street. Big banks, hedge funds, and institutional traders are all accumulating on the way down. Why? Because once the drop stops then a nice spike arises and the trend upwards begins. It could be a trend that lasts a few hours or maybe just 10 minutes. The length of time isn’t important. What’s important is that if you follow the smart money, you win. The big guys won’t lose.

So hmm why not join them? That’s where the real fun is anyway. And while all the shorts are quickly covering and buyers come in, you’re already nicely in your trade counting the dollar signs as your trade rises. But in this early morning trading, nothing is guaranteed. So don’t be greedy and take your profit. You might kick yourself if you sell and it takes off. That’s ok. It happens to the best of us and even me. In this game, though we want consistency. Not a win here and a loss there. Try this strategy out. Play with your momentum indicators and figure out what works best for you. Watch the session 930-1030 am est. every morning. Especially the E-minis and you will see what I mean. The next part is timing that entry. Stay tuned for my next article on how to time your trades to near perfection every time.

Til next time traders!

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