We know from one of our studies that the best time to trade breakouts in the emini contract is after a morning gap up “surprises” the market. Well, it turns out this same setup works very well for even shorter term (morning session only) day trades.
Because we are looking to exit the trade by the completion of the morning trading session (For us that is the first two hours of the trading day) We can remove the overbought filter that we found to be effective for day holds.
- Morning session: We look for a gap-up opening from overbought conditions, or a +10 point gap up if the market is not overbought.
- Within the first 20 minutes of the day, we want to see very limited price probes below the open. The best conditions set up if the low of the first 20 minutes is at most a few ticks to a point or so below the opening price.
- Within the first 20 minutes, we want to see several larger range five minute bars closing up.
- After this point, we want to buy small dips (.75 – 2.5 points) below new highs, or buy breakouts to new highs
- Exit criteria: A 1.25 point break below a 30 minute low cancels the long bias.
- 4-6 point profit target on long trades or 15-20 minute hold for scalps – If I catch what looks to be a good trade, I usually try to hold untill 10:30am CST. I don’t mind giving back some profits because winning trades can be huge relative to the time in the market.
- You don’t want to see any pullback last much more than 20 minutes. Beyond this point suggests momentum is shifting and longs might end up being the ones “squeezed”
- 10:30am: Exit any long that has not been exited via other criteria.
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I discovered this trading strategy during a period when I was almost exclusively swing trading. I noticed that when the market was set up for a short-sell opportunity on the swing-trade (multi-day) time horizon, there where often powerful, morning session rallies that really “squeezed” the position and made it quite uncomfortable to hold on too. Click here to sign up for my email list.
- The most common mistake when trading this pattern is wait for too big of a pullback. The problem with this approach is a large pullback suggests that the day is not a genuine short-squeeze opportunity, and that the setup itself is not going to work. by waiting for a large pullback such traders are unfortunately cherry picking losing trades.
- The second most common error is taking the trade after the market has been pulling back for 30+ minutes. The problem, once again, is that such a pullback suggests the morning momentum is not what it should be for the trade to work.
- Often, these “slow” traders are buying below a 30 minute low (combining both the above errors) and end up kicking themselves when their position gets creamed.
- Taking the trade too late in the day (After 11AM EST). This is really a morning setup. Day long holds from overbought markets tend not to be a good bet.
- You do not need to wait for 20 minutes to pass before looking to take this trade. If the first 5 minutes is a large up, you can start looking to get into the trade within the next 15 minutes. In fact, If I think there is a strong setup, I will often start buying before the first five minutes of trading is complete.
The same principle of reading price after a large gap applies on the short side. If after a large gap up, the market is not able to trade more than a few ticks to a point or so above the open (within the first 10-20 minutes of the day), This is a very good indication that the gap is going to fill. This should give the trader a short bias for the duration of morning session and can set up some very powerful short-sell setups.
This is one of the few trades where you can often set a pretty tight stop, both in terms of price and time. This is because the entire premise of the trade is that caught shorts will prevent the market from pulling back much at all. If on the other hand price cannot get much above the open, it indicates that euphoric longs are about to get creamed and the trader should have a short bias for the duration of the morning session.
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