Posts tagged "DOM"

E-Mini Training: A Common Trade That Often Ends in Disaster

If you have traded for any period of time, you start noticing where other e-mini traders are setting up to take trades. Sometimes I am very impressed with the positioning some traders utilize to enter trades; sometimes not so much. Of course, in my personal trading (and I am sure that most traders feel this way) I have specific trades that have been successful for me; on the other hand, I have several trades that many claim to be solid trades that I just cannot seem to execute properly.

But there is one particular trade that I see on a regular basis, and is usually executed by smaller e-mini traders, judging from the time and sales dialog box. This trade is often referred to as a bounce trade and often occurs along important or significant lines of support and resistance. I generally see this trade over the lunch hour and during periods of low volume trading.

The trade is a relatively simple one. Often times, when the price has moved through a significant support/resistance line, it is not uncommon to the price action retrace back to the recently pierced support/resistance line and then resume in its original direction. I cannot quote with any degree of accuracy the success/failure rate on this trade, though I have seen many small e-mini traders take substantial losses when trying to execute this trade.

The bounce trade can often require an e-mini trader to take an entry position in the opposite direction that the market is currently moving; and this entry is usually against this trend. Not an auspicious way to start a trade, to say the least. But lacking any major active e-mini traders (since the volume is generally low) the price oftentimes has a tendency to back up to the just pierced support/resistance line and then bounce 5 or 6 ticks back in the direction of the original price movement. For small traders, this 5 or 6 tick gain is just what the doctor ordered.

But there are a number of problems that should be considered with the trade, and careful consideration and care should be utilized before implementing this trade, because:

The bounce trade is often against the trend, which significantly lowers your chance for success.
The bounce trade is generally executed over lunchtime (when small traders are active and their trading has an disproportionately large effect on market price.) But trading during low volume periods can be, at best, a difficult proposition. Market orders that would normally have little effect on price can, because of the low volume, create more dramatic price movement than most traders would normally suspect.
This build up of small traders add at a print distinct price level creates a situation that can become a position of danger, especially if a bona fide floor trader who takes an interest in moving the market in the opposite direction of the expected bounce. What started as a simple 5 or 6 tick scalp can leave a small trader pressing the limits of his stop/loss position.

After watching this trade play out for nearly 25 years of my career, the results are by and large unsatisfactory. While this trade seems innocuous enough, the market moved by primarily small traders is especially susceptible to volatility in the opposite direction by larger traders who would like to take advantage of the smaller traders who are fully committed to their bounce straight. Any substantial volume in the opposite direction of the small traders can drive the price dramatically against these traders. As the smaller traders bailout of their positions, the price action moving in the opposite direction of the small traders original position is enhanced as they abandon their original bounce trade entry because the risk of getting stopped out becomes a very real possibility.

Oftentimes, it is very easy to spot on your trading DOM the small traders stacked up on a certain price that the traders hope the price action will retrace to and provide them with a nice gain of five or six ticks. While this trade can be successful under certain market conditions, it is my opinion that the risks of the bounce trade far outweigh the potential profit. I avoid the trade, and oftentimes watch with interest the plight of the small traders. Sometimes they come out okay; more often than not they have a very rough go of it.

In summary, we have discussed a trade that most traders see on a very regular basis. It’s called a bounce trade and usually entails trading off a known support/resistance line and hoping that the price action will stop on the alignment in question and reverse direction. That’s a mighty tall order for a consistently successful trade. I have to also reiterate that this trade often occurs during low volume periods of time like the lunch stand down period, or just a lull in the normal volume patterns during the trading day. Finally, I have commented that this trade can sometimes work quite well, but if the market moves against the traders in the bounce trade the results can be quick and disastrous. For that reason, I avoid recommending the bounce trade as a regular part of your trading arsenal.

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Posted by sglant - December 14, 2011 at 3:30 am

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