This post is for Friday, December 4th and what a reaction from the unemployment numbers.

Friday’s session started out strong, reacting off of the strong unemployment numbers, only loosing 11,000 jobs for the month. This was a lot better than the street expected, bringing in the buyers. The thing about it is, that it did not last. It sure did make for some nice trades to the upside, but the market stalled and the smart money used the rally to get out with the gains in hand. We did get within a point or two of that 1120 number that I have been eyeing for a long time now. I would call it a HIT, seeing that it has come so close.

This market has been trading very light volume as per the NYSE. The last few month, the volume has been slowing. September was lower than August, October was slower than September and November was slower than October. A growing trend or the calm before the storm?  With the kind of top we are putting in, broadening, with very little price movement, it could be considered worrisome for the bulls.

What has been forming for some time, is called a rising wedge, which is in a up-trend. That traditionally is considered a bearish chart pattern with the resolve being, a break to the downside. The characteristic’s of the formation is a broadening top, one that has slowed and has clear overhead resistance established, yet still making new highs. On the other side of the chart, the bottom side, you will see rising bottoms that seem to accelerate at a much faster pace, forming what appears to be a “Rising Wedge”. The movement is getting squeezed off.

The interesting thing about this formation is, that it is running out of room and something is going to give. As I mentioned, the give, is usually to the downside and often it breaks hard and fast. The reason is, all of the built up sell stop positions under each critical low. Traders and investors have been riding this market move up steady now for 8 months and they have consistently moved their stops up under each one of these critical lows to protect their profits.

We got a taste of how fast and quick the market can move with this type of setup building. Last week, after Thanksgiving as I may have mentioned in an earlier post, the futures market sold off around 45 S&P points in the night trading alone before recovering. That is equivalent to about 450 Dow points. What I believe was also happening, was a  shake out of the shorts. Those traders that tried to position themselves for this expected big selloff, were pulled in and thrown out, with a big fat loss.

The market never likes to make it easy for those traders who are trying to capitalize on any expected move. It will do what it has to in order to incur losses and build frustration before a big move. The next time the trader tries to enter on the real move down, he will hesitate and thinks that the market is just tricking  him again, but this time the move is real and he is “Left Behind”.  As he realizes that the move is real, he jumps in, just as the market is now ready for a reaction rally back up and he looses again.

This is typical market behavior and it happens in every time frame a would be trader engages with the markets. Successful traders have come to understand the natural rhythm and flow of the market. They use the above scenario to their advantage and are able to take money out of the market, where the struggling trader is just trying to make sence of it all.

There are many reasons why the markets tend to flow the way that they do. There is always a great deal of emotion behind buy and sell decisions, which then get released into a sort of herd mentality. As traders, what ever time frame you trade, your job is to minimize your risk first by pre-defining it and exploit the opportunities that favor a move in your direction. You always look to get the edge before you put on the position. No edge, no trade. If you do place a trade and you don’t see your advantage, then you are gambling, straight up.

As professional traders, there is no room for that sort of behavior. A gambler will never have the advantage, but hangs his future on hope and that is never where you want to find yourself. The market will do its job in purging the undisciplined trader from the ranks by leaving him with nothing but losses to show for his action. With this, even stronger emotions set in and self sabotage is too often the end result. It is very sad, that this happens day in and day out, but everyone on Wall Street who trades can not come out on top, even though they all think they will.

What are you going to do to make sure that you are not one of the undisciplined. How are you going to be sure that you have the edge and what will you do if you start to lose that edge? These are all questions that need to be addressed before you start trading.

One thing I caution any trader just getting started and that is, be humble. Don’t be overconfident and think that you are going to make a killing. Usually, it only works against you and makes your goal toward profitability that much harder and or impossible. The second thing is, be conservative and realistic with your performance. Having a goal of 8-10 points for each session is not realistic, especially for a new trader. A goal of 2 to 4 points is more practical.

All that being said, you must have a solid approach to trading or you will never see the light of day. I will try and pick up where I left off in my next posting.

Fridays trading, I did something a little different. I started a little earlier and finally saw some volume and movement, hurrah. Secondly, I played the move for a bigger point return. The first trade was stopped out for -1 point, the next was staggered for several points and I was done. See the video below.

Have a great weekend

Related posts:

1. Federal Reserve takes drastic step, Buys 300 Billion in Treasuries
2. Instilling Confidence as a Day Trader
3. Trader Coaching – Day Trading the “Easy & Obvious”
4. The Committed Day Trader !
5. As a Trader Thinks So Is He #3

Tags: aspiring day trader