Anatomy of a trade – trade what you see, not what you think!

YM E-mini September futures - 15 minute chart
YM E-mini September futures – 15 minute chart

Yesterday the YM E-mini index future delivered a masterclass in trading what you see, and not what you think. Trading with an opinion is one of the most destructive approaches to the market – just ask the euro bears who have been shorting the single currency for years. All to no avail. Yes, the euro should collapse, but not just yet, and certainly not until the ECB implements some sort of QE programme. Until then, the same applies, it’s trade what you see, and not what you think. But, returning to yesterday’s price action on the 15 min YM chart, this was a classic example which delivered a wonderful low risk trade in the afternoon session, if you were a volume trader of course!

To set the scene. The morning session had been dominated with gloomy news, as the mounting crisis in one of Portugal’s largest banks sent shock waves through Europe with stock markets tumbling, Bunds soaring and gold spiking higher as investors sought out safe haven assets. On Globex, ahead of the US open, the YM futures and others sold off strongly, offering some great trading opportunities to the short side. And don’t let anyone tell you that trading on Globex outside the physical exchange hours is risky. It isn’t. Yes there is less liquidity and volumes are generally light, but on mornings such as this, with strong fundamentals driving the markets, this is no more risky than at any other time, and to be honest, is often more measured and straightforward. Yesterday morning was an excellent example, with the weight of European markets helping to drive the index lower, delivering great trading opportunities as a result.

And so we come to the US open, which for many index traders, was a ‘no brainer’. Markets were bearish, risk off was dominant, and it was simply a case of selling the index and cashing in with some easy and quick profits. In other words, trading with an opinion.

As the session opened at 14.30 the index moved lower, but with no great conviction on the 15 minute chart as shown here. The first candle closed at 14.45 with truly massive volume and producing a long legged doji as a result, giving us a HUGE signal that the market was not in fact selling off. But in fact was a pause in market sentiment, and more likely the first sign of a major reversal. The following candle simply confirmed that the major operators were preparing for a significant rally, with this candle closing as a deep hammer. Good enough for me and time to join the big operators and enjoy the ride. This was a market preparing to rally, big time, whilst suckering in some bearish traders still trading with an opinion. Whilst there is no such thing as a zero risk trade, this was about as close as they come. Here was massive buying over 30 minutes following the initial bearish move lower, with most speculators expecting it to fall even further, no doubt under the mistaken belief that this was the start of the ‘big fall’.

Following the close of the hammer candle this was my signal to take a position which duly delivered some wonderful profits for the remainder of the session. So straightforward, so long as you believe in the power of volume price analysis as a methodology. Not everyone does of course!

To sum up the index rallied to a high of 16,890 before sliding lower to close at 16,839. In overnight trading the YM has continued to hold and is trading, at time of writing at 16,873.

YM September futures - daily chart
YM September futures – daily chart

It’s very easy, at times such as these, where we have seen extended bullish phases of price action, to want to believe that the end is nigh. It will arrive in due course, and in it’s own time, but not just yet. Indeed, yesterday’s candle shows the depth and significance of the buying support with the deep lower wick and associated high volume suggesting, as indeed did Tuesday’s price action, that we are merely at a pause point as we prepare to test the 17,000 level once again.

By Anna Coulling

 

About Anna 1027 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

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