Quote from NoDoji:
What you trade and what time frame you trade isn't as important as learning how to trade. The hard right edge is simply the place where you enter a trade. We can all look to the left and see how obvious something is, but can we look at price right this moment in time, recognize what it means for price to be at that level, understand what price would have to do to provide a clue as to what it might do next, and understand why?
It's like being a detective and a psychoanalyst all at once, and if you're day trading a 5-min chart, you have far less time to think about it than if you're swing trading off a daily chart. I try to avoid thinking and just put my order in place ahead of time so price movement gets me into a trade.
At the moment the market opened today what do you know for sure about the ES?
1. Price broke out to a new high of 1244.25 in overnight trading.
2. Price hardly budged before hitting another new high of 1244.50.
3. Price pulled back to the 20-bar EMA (a day trader's benchmark for mobile support/resistance in a trend).
4. This pullback in the uptrend held and price attempted to move up and test the new high.
5. Price failed to test the new high and stabilized in a narrow range around a flat 20-bar EMA.
Analyze the thoughts of market participants actively holding positions at the moment the market opens:
If you're long, you'll hold your position until you feel it's worth adding to it or taking some profits off the table. What would convince you to take some profits? A price break below 1242.50? Below 1241.00? Below 1238.25? What would convince you to add to your long position or initiate a new long position? A price break above 1243.75? Above 1244.50?
If you're short, you'll likely consider covering for a loss if price runs too far against you. What would convince you to cover for a loss? A break above 1243.75 or above 1244.50? If you want to sell short what would convince you that price is going lower? Probably the same thing that would convince a trader with a long position to take some profits, such as a break below 1242.50 or below 1241.00 or below 1238.25.
Instead of choosing a direction at the hard right edge, you decide to let price movement tell you what's likely to happen next, because price is in a narrow range around a flat 20-bar EMA. A price break either way should give you a couple points of move to play with. You bracket orders outside the range and wait to see what the majority of market participants ends up doing.
The market opens and your sell stop @ 1242.25 is triggered. Your buy stop @ 1244.00 that was not triggered becomes your protective stop. If price finds support at 1241.00 (next support in line), moves back up through the 20-bar EMA, and breaks through the upper end of the range, you'll be safely taken out of the trade for a small loss. If price continues to fall, you can choose a hard profit target or trail a stop as each support level in line gets broken until a perceived "bargain" level is reached, buyers step back in, and short sellers (such as you) decide to take profits. I, personally, would target 4 points or more.
