For Swing Traders Oversold Bearish market provides its own unique set of challenges.
The trader is simply confused into inaction. This is why:
The clear Bearishness in the market tells the trader that she should not take a Long position. At same time, the Oversold condition tells the trader that she should not take a Short position either. What should she do?
It is best to stay away from Swing trade at such times UNLESS the trading system provides robust signal to take a reversal trade. CUE charts Headwind signal is such a robust signal that we use to take reversal trade in Oversold Bearish Market. More on this on the next blog.
For now, let us see how how to make profit in such market condition even if the Headwind signal is not there.
This may be done by switching the trading style from Swing Trade to Day Trade.
Within a day market invariablly moves up and down. And with proper signal we can often take a Long or Short trade (or on some days, both Long and Short trades) and come out as winner. Let us illustrate this with real life trade examples.
Attached is the daily chart of QQQ NASDAQ ETF (Thomson Reuters symbol QQQ.O) using CUE Hop On template.
After moving up-down for several days in December 2015 and then early Jan 2016, on 7th January QQQ decisively came into downtrend (point 1 in Hop On chart above). Falling below all the Direction lines. On that day it had gapped down at Open and fell further.
In subsequent days it continued to fall. and the Bearishness increased. All along price stayed at or below the Lower Boundary line - showing that QQQ was oversold.
This is confusing times for Swing traders.
But worry not. We could still take profitable day trades. For the actual Day Trades we look at 19th Jan (point 2 in the chart above) and 20th Jan (point 3 in chart above).
On 19th Jan QQQ Opened with Gap Up and fell down. And on 20th QQQ Opened with Gap Down and went down further in the beginning - later on recovering somewhat. Our CUE charts allowed us to exploit both days' market movement to take profitable Day Trades.
First, let us look at 19th Jan QQQ chart using Fine Tune Real Time 5 Minute chart as shown below.
Soon after Market Open with Gap Up as marked in the chart above, price fell below Early Range Low with a magenta color Candle indicating entry point for Gap Short Day Trade (marked as point A in chart). At that time our traders took Short trade on QQQ using Put option (QQQ Put 100 expiring on 22nd Jan).
[To learn more about Gap Day Trade, you may read the complimentary books available at our Education Center.]
Stop Loss point would be above the Early Range High (which was Day's High in this case). That Stop was never triggered.
Instead, QQQ fell. At the right side of the chart (marked as point B) Activity picked up to Extreme level (marked as point C). Sudden Extremely level of Activity "may" indicate price reversal. We had good profit. And we wanted to protect that profit.
The trade was closed with 45% profit (shown on the brokerage chart as point D). This was indeed a very profitable Gap Short Day Trade.
Let us now look at 20th Jan Fine tune chart on the same symbol QQQ.
As can be seen from the chart above, soon after Opening with Gap Down, QQQ fell further below Early Low price level. Therefore, we did not have any set up to take a Gap Long Day Trade.
We waited patiently. At the point marked as A in the chart, QQQ displayed a Bullish Stretch Release signal while at same time Activity was Bullish and much higher than the several previous Bearish bars (shown as point B in chart) and also, Relative Performance (white dashed line super imposed on the Candle chart) tilted up - showing that QQQ was starting to be stronger than broad market. Other market ETFs were also starting to strengthen (those charts are not shown here).
Our traders took a Stretch Release Long Day Trade using QQQ 98 Call (expiring on 22nd Jan). Stop would be at the Low of the Day which was never triggered.
[To learn more about Stretch Release signal, you may read the complimentary books available at our Education Center.]
Soon after entry, at point C, the trade had 20% proift. as shown on the brokerage chart at point D.
The Market was Bearish and there was a possibility of price reversal from Early Low price level. Instead of risking our 20% profit, our traders clsoed the trade at 20% profit. Again, a very good profit for a Day Trade.
These are two examples that illustrate that with the right Trading System (we use CUE trading system) one can take a Low Risk High Probability trade in almost any market conditions. And come out winner. Not on every trade. But enough times to have a net proiftable investment result.
And this also shows how a Superior Profit trader using CUE charts may switch from Swing Trading to Day Trading when market is Bearish and Oversold and continue to earn income from the Market.
Does your trading system and rules allow you to do the same so easily?
Citizen of Main Street.