Save Your Trading Bullets

In a recent trade room session, a situation came up whereby a very clear reversal play came up that had the potential to make a good number of ticks if it played out. The trouble was that there were setups occurring before the scenario started to take shape. So an important question needs to be addressed here – should you trade a strategy at a certain time of day irrespective of technical scenarios and likely trading activity or is it better to save your trading bullets for when you think there is likely to be a better move?

In a recent trade room session, a situation came up whereby a very clear reversal play came up that had the potential to make a good number of ticks if it played out. The trouble was that there were setups occurring before the scenario started to take shape. So an important question needs to be addressed here – should you trade a strategy at a certain time of day irrespective of technical scenarios and likely trading activity or is it better to save your trading bullets for when you think there is likely to be a better move?

Setting the scene

Let me elaborate on the specific set of circumstances that we were faced with in the room. Last Thursday in the EU morning session, the markets were digesting an FOMC minutes release that hadn’t been quite as hawkish on rates as had been expected. Incoming European data particularly from Germany, had apparently quelled the FOMC’s urge to raise rates as soon as they had previously been expecting to do so. Stocks had rallied in the US and Europe had followed to a lesser extent.

We were looking to trade the FTSE futures and they were ready to open fairly close to the post FOMC minutes highs.

Creating expectations

The reason that this was a special situation was two-fold. The first was that frequently where there are news/economic releases that move the market, there will be a retest of the point of origin of the move or the “scene of the crime” (SOC) within a relatively short space of time – sometimes by the next session and sometimes within a few days. The second reason is that the move up seemed pretty suspect given that all along the Fed had been telling us that rate expectations are data dependent and the data was already widely available.

Z 125 Tick Chart

Therefore, given the fact that there was a strong chance that the FTSE might retest the SOC some 50+ points lower, the expectation was that if a test higher couldn’t find additional buyers and after an initial test lower more selling was found, a short bias may have been a very profitable one. If on the other hand a test lower found renewed buying vigor and the prior day high was significantly breached, the chances would have been that the reversal was much less likely in the very short term at least.

Never look a trading gift-horse in the mouth

A huge psychological trap that traders invariably fall into is not taking an obvious and excellent opportunity, only to take ill-advised trades in an attempt to make up for it. The trouble is that it’s so easy to lose in these circumstances especially considering that the markets in this specific case, were moving about quite a considerable amount. So being ready for and taking a shot at a potentially big move can actually help you to keep a firm grasp of the wheel.

No crystal balls

Can you ever really ‘know’ when the best trades will come along? Of course not. There are times when specific variables such as those already discussed, might elevate the potential for the markets to make a big move, but until markets start to show you that they have intent and that move starts to happen, it’s just an idea.

So changing your whole plan because there is the potential for a big move isn’t necessarily the best idea given the fact that we don’t have a crystal ball that enables us to know what the market will do. So it’s important that you still take other opportunities in the meantime as these could well be profitable and if the main move fails to materialize, they might be your best chance of pulling in some ticks for the day.

Save your trading bullets

This is what happened on Thursday: –

Z 125 Tick Chart

The trick is to use common sense. If you have a set daily loss limit (which you absolutely should have), then take a trade or two early on and see how the session progresses. It may be that you take a winner or it may be that you take a couple of losers. But then if you are down a little, allow for an additional main trade later on if that big trade shows up. Being down a lot of ticks before the event is not good from psychological or equity perspective – recognize when there’s a chance for a big move and save your trading bullets so that you are still able to trade it.

Trade well.

For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.