Trading requires discretion based on experience and screen time.
Everything I trade is traded in context of the scenarios laid out in the pre-market analysis. I firmly believe profitable trading is rooted in planned trades that eliminate the need to do much thinking during the day. 95% of trades I take are in the zones. The trades that are not planned and that I somehow find throughout the day are typically my losing trades.
These trades are in areas that are likely to produce a bounce/reversal. The location is ideal from an r:r standpoint.
These trades involve a flip or breakout/breakdown of a key area when the market is moving swiftly. These types of trades often present less than favorable r:r (depending on the target) as with momentum the likelihood of a decent pull-back nearer to where the idea is wrong is significantly reduced. This means wider stops. Often with the ES these trades need to start as scalps as you will need to refine your entry given the wider stop required.
This is a location based trade involving fading zones for short-term reversal of a move according to the scenarios.
This is a location based trade involving fading zones for a 2R+ bounce according to the scenarios. A reversal is not expected here, but a decent bounce off the zone is expected.
This is a momentum based trade. This can be intraday balance breakout/breakdown or larger timeframe in context of the scenarios. You can take enter a trade at the breakout/breakdown area or wait for a pull-back to the breakout/breakdown area or a fib retracement level such as 23.6% or 38.2% if within the max 1R risk parameter.
This is often a momentum based trade, but can also be classified as a location-based trade when there is a lack of momentum, but the flip/pull-back continuation idea is still valid. This would be a pull-back to a key zone in context of the scenarios.
Unless there is some very, very obvious divergence across both the NYSE and S&P500 ADs, then the AD is useless. If at the open, the ADs are very strong and showing very high values and the ES is below the prior day’s cash close, then that has the potential to eventually be priced into the ES and cause a movement up. In addition, if at a key support zone and the ADs are both clearly holding up for the day, then that is a divergence and a has the potential to eventually be priced into the ES and cause a movement up. These divergences are ONLY useful in context of the scenarios. The ADs diverging into a random zone means nothing by itself. Sure a bounce can occur, but that’s not how to be consistent.
The NYSE TICK is a great broad market momentum gauge, indicating how aggressive buyers and sellers in the broad market are. When the TICK is swinging from +600s to -600s, the market is primarily balanced. When the TICK is primarily sustained above 0 and testing the +600s area or sustained below 0 and testing the -600s area, then the market is typically directional. NYSE TICK divergences have proven to be meaningless. I find Sierra Chart’s NYSE TICK to utilize the most realistic and accurate calculation whereas Tradestation’s is too filtered and averaged out and DTN’s is seemingly invalid. The TICK is also a great gauge of volatility: if the TICK is swinging back and forth hitting +600s and -600s, that’s a volatile market.
The NYSE TICK is not a crystal ball. The ES and TICK often diverge. What really matters is what the ES is doing in context of the scenarios. The TICK is a great momentum gauge of the broad market, but if the ES does not respond to that, then it is meaningless. We trade the ES, not the TICK.
Simply put, for sustained moves, the three indexes should be in alignment. If the ES is breaking out or breaking down and the move is to be sustained in the short-term, all three indices should be doing the same. If the NQ and the Russell are going in opposite directions, likely that will produce chop in the ES. This is not always true, though. The ES can act on its own. To remember, we are trading the ES and NOT the NQ/Russel.
For the ES you want to be able to refine your entry as much as possible to reduce the possibility of having normal market volatility stop you out. Reading order-flow enables you to do that. In addition, reading order-flow throughout the day is a great way to gauge the dominant side and how aggressive they are. Bar charts do not show you enough information to be able to get an accurate read on the market. Order-flow enables you to MORE accurately determine which scenario is in play. Order-flow is the most important of all the tools outlined here as it is what is happening in the ES vs what is in the broad market.
Define the area where the trade idea is wrong and execute as close to that area as possible and within your risk parameters. Refined entries are required for the majority of trades in the ES. I have found that using order-flow is the best way to refine your entries. The reason for this is that ES tends to thrash around at key areas due to the supply and demand imbalances that these areas produce and also because of the games institutions may be playing with retail traders at these areas. Order-flow reveals this action and you can adjust accordingly. There is a reason the ES often reaches just beyond support and resistance zones, seemingly invalidating these areas and then reversing. Resting orders and bar charts put you at a disadvantage in the ES.
Another thing to keep in mind is the overall condition of the market. Is the market volatile? If so, that’s more likely to produce a choppy test of support and resistance. Is the movement to support and resistance strong? Then that is likely to produce a choppier test. Is the market balancing ahead of support and resistance? Then all the traders who entered positions in that short-term balance area will be forced to exit their positions as price pushes into support and resistance and that will likely produce a choppier test.
Scaling should only be done when you are forced to due to market conditions reducing the potential of the trade idea. Otherwise, use an all-in, all-out approach. Scaling forces you to have a higher win rate. All-in, all-out gives you a margin for error and forces you to focus on trades with more potential. All-in, all-out is also a lot easier from a risk management standpoint.
Scaling should never be an emotional response. Follow the scenarios.
Risk 1R per trade, whatever that is according to your risk tolerance. Target 2R+ per trade and never take trades with less potential than that. Scenarios dictate the potential of trade ideas.
Not every swing in the ES is tradable. If you did not plan for the trade in a scenario, then you did not miss out on anything. I am a risk manager first and foremost. The market has to work to present me with an opportunity that I can afford, can understand, and have planned for in my scenarios for the day. The market does not present me with surprise trades.