Gilbert “Gman” Mendez is the Head Trader at SMB Capital.
The volatility is coming back to the market. Although just not in the way we are used to. This market is punishing those who trade strictly off of old school market patterns and rewarding those with trading skills. Let me explain.
Over time we have found intraday patterns that allow us to stack probability on our side. Here are some common ones:
• We do not buy stocks intraday that have broken long term support and vice versa
• We do not short strong stocks that are consolidating at the highs of the day and vice versa
• If the market gaps up and establishes a tight range on the open it is okay to play the longs on the break of resistance aggressively
• If the market is trending up you should be looking for strong stocks to buy and spend less energy on the weak.
When you possess the knowledge and the market cooperates you can be sloppy with your execution and be often rewarded. As knowledge-based traders you need to have a huge tolerance for pain as the real stops on these plays are often wide. Further, as such trader you can expect to have big daddy swings in PnL, especially when the market is just not cooperating.
One of my traders found the following clip which is quite representative of what a knowledge-based day trader (KBT) — represented by the fancy trick guy — may experience in these sessions. Mother market just waits patiently and quite literally … well I’ll let you watch the clip.
Let me show you a graph of SPY to exemplify what an average day in the market is like with the HFT algos in full force:
The circles above represent areas where a KBT trader may have found confirmation that they are either right or wrong. Let’s talk about them in more detail from left to right
1. This break confirms that the market may go higher after taking premarket resistance with decent volume.
2. This one confirms that the break in 1 was fake. Most would get out. Some with a higher tolerance for pain would have stayed in or even lightened up
3. A new high getting ultra aggressive and chasers to get back in full tier… But there is zero to no follow through after entering and it is all pain from there.
4. Assumes the trader finally threw in the towel and gave up. The longs are now looking at that 5 min flag to get in on the short side.
5. Again market yo-yos to the other side stopping out shorts. The circle highlights a possible flag entry for longs looking to add and those not involved waiting to get in.
As a better exercise I ask you to take a look at any In Play active stock (AAPL, AMZN, GOOG, JPM, GS, etc) and try to trade the “trend” using knowledge based patterns for any day this month. My favorite days to watch your account get slaughtered in amusement so far are Feb 1,3,8,9 … Good luck with that.
So how do we combat these shenanigans? In my opinion the only way to do it is to move onto a skill based system where you are practically trading move-to-move. Yes, it means grinding out money more actively. But if GS is doing it and crushing it, why not join the party? This requires you to be more patient. Be the guy in the video sitting on the sidelines waiting for that trade, and when you see it then crush it … crush it like a grape. Happy trading!