In order to consistently make money trading, one must have the ability to adapt. There are times when it is quite easy to make money and times when it seems impossible. This is due to changing conditions or what I refer to dozens of times in my material as “context”. I’ve covered this in previous blog posts but thought I could perhaps add a different twist to it or if not, at least refresh the idea in people’s minds.
The action in the stock indexes today (Feb 2nd) was rather choppy. The runs were short-lived. It was a situation where, if you tried to buy ‘support’ in the morning looking for a bounce or ‘double bottom’, you were quickly run over and on the wrong side as the market made new lows. But if you chased the move and sold after the market made new lows, you were also quickly run over and on the wrong side as the market bounced, at least temporarily. Price eventually retraced off lows and settled into a sideways pattern of low volatility but I’m sure many people had already thrown in the towel by that point. It was not ideal for scalping. I was caught on the wrong side a few times in the chop. I finished the day positive but it took a lot of patience and perfect timing on just a couple moves.
This happens in every market. When the runs are big and it’s easy to get paid, professionals will add size and try to capitalize on the good action. When there’s a lot of back and forth and it’s difficult to get paid and small profits are constantly disappearing, professionals take the small amounts where they can and try to call it a day early.
You must learn to recognize the different types of days and types of action. You cannot use a ‘one size fits all’ approach. Flexibility in the thought process is necessary for long-term survival in this business.
If you take a few trades in the first 30 minutes and watch a small profit turn into a small loss, that’s a sign you need to take the quick money when it’s given to you. If it’s a day when the ES is snapping 10 full points every time it breaks highs or lows, then swinging for a larger run is warranted.
A student recently contacted me to discuss a scalping method he had been using a couple months ago to trade the ES when there were regularly 150 or more contracts on the bid/ask at every price. The ES does not currently have that kind of liquidity and the volatility has increased quite a bit as a result so the strategy he was using then doesn’t currently work. It will most likely work again when that type of liquidity returns but in the meantime, he is looking for other products to trade and assessing other strategies that might be used for the ES. Most importantly, he is not attempting to trade the way he was awhile back. He understands the way context influences price behavior which, in turn, influences the decision making process and what strategies one implements.
There are some ETFs which are extremely good trades when they are priced below $20. Scalping them can be highly profitable for months on end but once they drop to a certain price, they reverse split. After the split, they are usually no longer good trades because the liquidity isn’t the same. They eventually drop below $20 again and are good trades again but in the meantime, a trader has to find other ETFs and stocks which are better for scalping.
One of the reasons I keep futures traders focused on treasuries is because they tend to be fairly consistent in their behavior. This is because they are usually very liquid. You’re not going to get a 40 tick run in the 10-year notes but it’s possible to grind ticks here and there on some size and make decent money and you can be pretty sure the conditions aren’t going to drastically change overnight (barring something like another pandemic). Conditions do change in the treasuries and there are periods when they are difficult to read but they rarely get extremely volatile to the point where strategies which were working last month aren’t going to work again for another three months.
Finishing this post on a slightly different but related topic:
A gentleman I know wants to trade but told me he needs to make a certain amount per month to maintain his lifestyle. Aside from needing a rather large bankroll and needing to be a very skilled trader, I told him he also has to understand the money comes in waves as a result of changing conditions.
Any professional will tell you that you cannot rely upon a ‘weekly paycheck’ in trading. You might crush one month and struggle to break-even the next. This is the reality and it’s one of the most difficult truths for a new trader to accept. However, the sooner a new trader accepts this fact, the sooner that trader will begin to make real progress because he will begin viewing things from a month-end and year-end standpoint and not become emotionally distraught over the day to day swings in P&L. He will learn to cut losses much quicker and not feel the need to be involved if he doesn’t see any trades which meet his criteria. He will stop trying to trade for this month’s rent money and instead work on gaining the skills necessary to actually make a living as a full-time trader.