Before I know what trades to take, I need to know what the PA context is at the moment I am trading. I look at the this on higher time frames pre open but I also need to take a view on this at the cash open:
- Is it expanding or trending?
- Is is contracting?
- Is it ranging – and maybe clearing orders before making a bigger move?
I need to know this before I know what strategies to use.
- Are the 169 MA and 21 EMA close together?
- Are the MAs flat?
- Are the upper and lower BolliBands on the M1 less than 30pts apart?
- Does price make HHs and then LLs, followed by LHs then HLs?
- Does price retrace more than 61.8% of each move?
- Is the Futures session H-L less than 30?
- Is the H-L of the first 30min bar after the cash open less than 40?
Example 1 24 July 2018 – contracting before a big move
On this day, you can see that the answers to all questions above are ‘yes’.
On this day I didn’t ask myself the question “what is price doing right now?” And so I was trading retraces and getting stopped out. This would work OK as a scapling strategy in this PA context but you need to be out fast. No ‘giving it a bit of room’. This market is getting so tight that it has to move one way or the other soon but first it will throw as many riders as it can off its back…. because its purpose is to maximise trade.
On a higher time frame, this had gapped up and was holding onto gains. It retraced briefly down to CBOL. Compressions are likley to take the path of least resistance and in this case it was up. Once the compression broke it leapt an easy 100pts.