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Trader
Linda Raschke Provides Tips on Day-Trading S&P
By
Jim Wyckoff
(Note:
I wrote this story a few years back, when I was a journalist with
FWN.)
The
S&P 500 futures market is a trading arena unto itself, which can
accommodate many different trading styles, according to Linda
Bradford Raschke, a well known trader, lecturer and president of LBR
Group, Inc.
“Not
only does this market display a different daily profile than the
other futures markets, but it has a much longer “length of line”
(intraday swings), which offers more trading opportunities, she
said. “Additionally, there is a wealth of information provided by
many internal indicators on the equities market that some
professionals like to monitor.”
Raschke
is a featured speaker this weekend at the 20th annual Technical
Analysis Group (TAG 20) Conference here, sponsored by Telerate
Seminars.
Below,
the longtime trader provides some tips on trying to be a successful
S&P 500 day trader. “However, let me also say that the
majority of the professional S&P day traders I know tend to
specialize in just one pattern or trade just one style. This is
definitely a market where overtrading can be a temptation.”
“SWING
TRADING” CONCEPTS
The
principles of “swing-trading” involve applying basic technical
analysis to the secondary fluctuations which occur in a market, said
Raschke. “We can apply these principles to all timeframes and all
markets, but they work particularly well with the S&Ps, so a
brief summary is first in order.”
Swing
trading is following the price action and learning to anticipate the
market’s most probable course of action. “We learn to determine
the immediate trend by observing whether upswings are greater or
lesser than downswings. In a simplified model, we look to enter on
retracements in the direction of the trend. An early sign of a trend
reversal is a ‘test’ of a most recent extreme price level which
usually forms a higher low (or lower high).”
A
trend reversal is confirmed when the upswing leg exceeds the length
of the downswing (or vice versa). If a trader enters a position on a
“test” looking for a trend reversal, but does not get this
confirmation, he should exit the trade or pull his stop up close to
his entry price, said Raschke.
There
are also periods of market rest, consolidation or low-volatility
range contractions. These patterns provide an opportunity for
traders who like to trade “volatility breakouts”--a methodology
in which one waits for the market to tip its hand with a powerful
thrust and then jumps on board in the direction of the movement. “This
too, can be a form of swing trading, as we are playing only for the
market’s next immediate move and not making any longer-term
valuation judgments.”
“When
a trader practices the principles of swing trading, he learns to
develop a conceptual roadmap in his head. In the S&P market, it
is particularly important to learn to think in terms of concepts
because there can be so much distracting intraday noise.”
Some
more examples of concepts, in S&P 500 trading, are: mid-morning
trends tend to carry into 11 a.m. Central Time, plus or minus 15
minutes. The best average intraday trends tend to last 45 to 90
minutes before having a countertrend reaction. The earlier a trend
starts, the earlier it “peters out.” There is often an
opportunity to play off a reversal of the move into 9 a.m. Central
Time, plus or minus 15 minutes. The markets tend to be more
emotional at the beginning of the day, when a good move counter to
the initial opening swing can occur.
“If
you learn to think in terms of concepts, you can master the markets
instead of becoming a slave to the charts,” said Raschke.
TIME-OF-DAY
TIPS
On
average, there are only two to three “great” S&P 500
intraday “legs” or swings, said Raschke. “Most professionals
catch only three or four really great trades a week, if that. Most
trades will often be very small wins and losses. So don’t be too
harsh on yourself if you feel that you are missing the majority of
the movement. Overtrading suckers one into seeing only the trees and
missing the forest.”
Traders
tend to be creatures of habit, and thus it is easy to compile market
tendancy charts. There are several key patterns which have held
constant over time, she said. “One common pattern might be the
market rallies or sells off into noontime. At this point, a large
percentage of the floor traders and brokers in New York go to lunch
and a countertrend correction begins. When the late stragglers get
back from lunch, the morning direction tries to reassert itself
again.
“If
the afternoon rally or sell-off starts too soon, it won’t be able
to sustain itself through the end of the day. It will die out around
the bond close. However, if there is an afternoon ‘shakeout’,
usually between 1-1:30 p.m. Central Time, then the market can finish
in a trend mode into the close.”
Raschke
said not to fade a move into the last hour of the day, “for there
is no time to exit gracefully if wrong. The odds suggest a better
entry price the next day on the probable morning follow-through.
Moves on Friday tend to end at 2 p.m., not 3 p.m. Central Time, as
too many traders prefer to flatten out or even up before the
weekend.
“On
many days there occurs what I call the 2 o’clock jiggle. Right
around the time the bonds close, there is a great 10-15 minute scalp
trade. I believe it occurs as an emotional reaction to how the bonds
go out. The trade usually lasts for no more than 10 to 20 minutes,
but is fun to anticipate.”
Sometimes
a good selling opportunity occurs around 1 p.m. Central, she said.
“In fact, it is amazing how many good turning points occur on
hourly readings, for example, 9:00, 11:00, 12:00. It think this is
because people are more conscious of time at these moments, creating
a slightly sobering effect.”
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