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In a previous article, I was talking about trend days and I promised to show you how to trade the day AFTER a big move.

Imagine the kind of day that goes up 2% or more… where the bulls are just unstoppable. Something that looks like this

 

Think about the psychology of the people involved.

There are insufferably gloating bulls trying to decide if they should take profits or be greedy.

There are shorts who got squeezed out who are sitting on the sidelines, burned and afraid to get back in.

There are sideline bulls who wish they were long and are probably waiting for a pullback.

There are bulls who got out too early and wish they were still positioned, looking to buy back in.

There are wishful thinking amateur hour bears trying for “mean reversion”

There are idiots in the water… nothing attracts amateurs into the market like reading big news in the morning paper.

Put together it’s a lot of cross-currents… between the profit taking and the positive feedback loop from the trend day… who could possibly guess which way those guys are gonna jump?

Odds are overwhelming that its gonna be a choppy mess. The psychology of all the different groups is just too hard to figure.

It’s very rare for the market to make it easy for you one day, and then give you the same thing again the next day. It just doesn’t work that way.

So…

After a massive day in either direction, the highest probability is a choppy, low volatility mess trading in a tight range.

Something that looks like this on a 5-minute chart. For market nerds this is the exceptional trend day of 12th March 2009. (note the typically strong kickoff was the big clue… remember early recognition is key)

 

 

See how the whole day is basically a choppy range? No real tradeable trends at all. That’s totally normal, expected, and you can profit from it.

Now… remember when I told you to take your indicators off the chart on trend days before you get carried out on a stretcher?

This is why. I’ve put a simple 3,10 oscillator on the chart since it resembles many of the commonly used indicators (which all behave very similarly anyway)

 

 

Now to illustrate just how BAD indicators are on trend days… take a look at MACD, Stochastic, and RSI in comparison. Every last one of them sucked out loud all day… open to close.

 

 

 

OK so we know not to use indicators on trend days… but check this out!

The day AFTER a trend day indicators are MONEY!

 

 

 

And MACD for good measure. Picks the top like a runny nose, then the bottom as well.

 

 

Now in general I’m not a fan of indicators… since they are mostly price, just turned into a squiggle. But there is no doubting that this special case they are really useful.

And the indicator you choose doesn’t matter as much as you think… it’s the concept which matters.

Can you guess why this works?

I’ll explain in more detail in a few days but the short version is because volatility is far more predictable than price is far more predictable than price.

Super low volatility is unsustainable… just like super high volatility. And a 2% or more up day is the very definition of volatility expansion.

As with everything… Don’t trust anyone… even me. Test everything… believe nothing.  I’ve written extensively on scatter plots and how to do a proper backtest. 

Remember, the entry technique is only half the battle… Getting the exits right has a MUCH BIGGER effect on results.

Amateurs look at entries… professionals obsess over exits.

If you haven’t seen it you really should own my Price Action Masterclass

It contains every single thing I know about reading the tape… and I show you how to design your own entry setups to base your systems on.

And it includes a video on trading the EXACT SAME SITUATION as we covered today. If you want to dive a bit deeper on this fascinating topic.. this is for you.

Invaluable.

Anyway… if you want to take your knowledge to the next level… click here.

All the best

Scott Phillips

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Matt Vann

Matt has been trading for over a decade, trading with various forms of Futures, Spread Betting and occassionally, CFDs. He'll trade limited markets including Indices, Currencies and selected Commodities such as Silver and Natural Gas.

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