For every move, there is a countermove.
No matter how big the bar is, the next bar can eliminate it.
No matter how perfect the pattern looks, one move can destroy it.
No matter how sure you are about the direction of the market, you can be totally wrong (on any timeframe).
This is a concept I struggled with for a long time. I'm getting better at remembering it, but it's a work in progress.
Here's an example from yesterday's trading session that nearly caught me out.
Let's start out with the Daily, which looked pretty bullish:
Next, check out the 5m premarket chart. It's got a relatively tight sideways range followed by a pop up, a pop down, and then a strong move up right ahead of the open:
So, have you got a bias yet?
Mine's pretty simple at this point:
- I'm expecting a big push up...
- ....but first we need a dip + scoop, because that's how the NQ rolls.
Here's what we get in minute #1:
Well, we get the dip.
But the problem is, we also broke the recent high and failed.
The shape on the right is more likely to result in a push up.
I wrote about double pressure in last week's post - the situation on the right is indicative of double pressure forming.
- Bears that got in early in the candle will realize they're probably wrong, feel pain, and are highly likely to exit their position if the upward move continues.
- Bulls are watching the situation with a lot of excitement. Some early bulls are already in the trade and significantly in profit while others are waiting for the candle's high to break. Both live bulls and sideline bulls are DEFINITELY anticipating a test at the major (blue) level.
--> Boom, double pressure.
But, that's not what we got.
Instead, we got the situation on the left.
Both sides have taken a shot at the trade and both sides had their idea sorta flop.
On the left, first we had a push up and a fail at the minor high, followed by a major push down. Then the push down fails and we pop back up almost all the way to the open.
So both sides have already been burned (and we're only 60 seconds into the day).
But, it's the NQ open - so everyone is still super gung ho about jumping into a trade.
That's why this trap is so great - check out what happened in minute #2:
At one point, the chart looked like this:
Keep in mind, this is happening mid-candle.
Hindsight analysis is usually incomplete because you're only looking at completely finished candles - you don't really get a sense of the live emotions as a candle is developing.
So, a better way to look at it is something like this:
Bulls are piling in, right?
There are probably even more Bulls just waiting to enter as soon as price potentially breaks the premarket high (the blue line).
To these excited Bulls, there's no question that we're going to break out above the blue line.
That sense of no-brainer confidence is exactly where the best traps can be laid.
So with that in mind, let's take another look at what happened in minute #2:
NOW, what are the various players thinking as the trap actually plays out?
Here's another animated version:
Think about the different levels of "uh oh" for the Bulls who entered at various points.
- There's the fail at the high of minute #1.
- There's the fail at the prior minor high (the dashed line).
- There's the fail as we go from Green to Red.
- There's the fail as we drop below the open.
The Bulls who were so confident a minute ago have just been crushed. There's no reason for them to try to re-enter without another significant catalyst.
Bears, on the other hand, are winning. They've won a major surprise battle and they're sitting ahead of a significant level test (the low of bar #1). Whether they're live Bears or sideline Bears, the expectation is definitely DOWN.
Hint: That's a recipe for a scalp.
Significant shift in power + clear risk levels = strong story.
Here's what happened next in this story:
Come for the level test + breakout, stay for the potential continuation move.
In this case, minute #3 turned out to be a pretty strong move - 15 points from top to bottom.
But, check out what happened next:
Moral of the story is this:
If you're trading the NQ at the open, you've got to be ready for countermove after countermove. You can never really consider yourself in the clear until a REALLY big shift or a major catalyst comes into play.
Here are a few exercises I've used over the last couple of years to try and avoid falling in love with one bias and remaining open to other scenarios.
- Who's thinking what, where?
- What would this candle look like if it flipped?
- What would the next candle have to look like to flip people's opinions?
- How excited am I getting about this setup? Too excited?
- How close are we to the close of the candle?
Visualization exercises like #2 and #3 above are REALLY useful, especially if you've never done them before.
An old friend of mine used to actually draw out various scenarios by hand and he swore by it as a great tool to get used to dynamic changes.
Personally, I think the best option is video. Recording your session and playing it back is fantastic - even if you're just watching price action instead of studying individual trades.