May 23, 2011 - Trade of the Day

Once again, the trade of the day is a prime example of taking advantage of disequilibrium in the supply/demand curve. This is often the case at the beginning of the regular trading hours, as overnight orders accumulate. Please look at the chart below. This is a picture of the trading range the e-mini SP500 has been trading in for the last several weeks. Of prime significance are the price levels defined by the green band. The band represents a range of prices, created by a huge gap back on April 20th, which has yet to be filled. A price gap represents the strongest supply/demand imbalance imaginable.

When price opened today, a powerful set of opposing forces were in play, setting up a great opportunity. While the unfilled gap prices represents a strong buy side imbalance, something else was going on. Note that today's prices opened BELOW the previous, and obvious, pivot low. The masses are often taught to sell such breakdowns in price. This is the typical herd mentality. We have many selling right into a price range which has already demonstrated (in the form of the huge open gap) more willing and able buyers than sellers. All these sellers are selling into a trap. Once the market opened, it was simply a matter of looking for a transition in order flow from follow through on selling to follow through on buying.

Once again, we employ the trusty Footprint. I have purposefully left off a lot of annotation so that you might be able to really see the pattern I look for. Focus on the lower two price levels of the bar. Second lowest level had about 10 times as much selling as buying, but guess what.... no follow through in price. The low price had almost no trading at all, just 38 contracts traded. This was all immediately followed by adjacent price levels of significant buying. The entry price is marked.

Above is the actual trade log. As it turned out, it wasn't spectacularly profitable, but that's not the point. The point is that if you focus on accurate ENTRIES, and keep getting at least break even opportunities, that some of these trades will go on to larger returns. I scale out of the first two contracts rather quickly, then let a mechanical indicator keep me in the last position as long as possible.

It's about as low stress a way to day trade as you can find.