Thursday’s gap up on the YM was one of those rare ones that opens right on resistance. Pretty solid resistance at that: 11099. This was a level the market couldn’t breach for several days now. Anytime it’s got near it sellers have stepped up and pushed the market lower.

So when the market opens up at the level, my primary premise was to see the sellers come in again and at least attempt to push it lower.

I see the market pop 10 ticks or so at the open and notice a tape seller heavy offer. That’s my queue to get short, target gap fill (40pts)

The trade looked good and the market started to push lower, then a big buyer stepped up and popped it right back to the open, he backed off and it dropped lower. As soon as it got lower he stepped up again. Hmmmm this is interesting information, where is the seller from above? Why is he not panicking to get his order done and lowering his offer? I scaled out half for 6 ticks, lets reduce the risk on this trade it’s not behaving as I’d prefer.

For the market to move a buyer or seller has to become aggressive and start to pay offers and hit bids. Just sitting on a bid or offer won’t move a market, only stop it. But consider if you’re an fund with a large buy order to fill, you stick 50lots on the bid, it gets filled so you stick on another 50. Say 10 get filled before the price moves away from you. If you think the market will come back to your bid, you’ll leave it there. But if you think the market will run away from your bid you’ll likely move it up a few ticks, and if that doesn’t get filled you might then pay the offer. This is what causes higher lows in an uptrend and ultimately blow off tops.

Back to my trade:
So I had half my short left and I was seeing a buyer bidding whenever the market dropped lower, not only bidding but sweeping a few offers also. (this shows up as tails on the 1 minute candlestick chart)
So what do I do?
I do the only sensible thing I listen to what the tape has told me and cover my short -6 in this case. A scratch trade. I was wrong, but I don’t care. I’ve now got more information and a better trade has presented itself. Get long in front of him, close if he lifts, max risk 8 ticks. I look for my likely target, the overnight high looks good, or a +1000 tick reading.
Bingo, the buyer gets more aggressive and the market pops, there’s no sign of that seller from before and there’s little resistance to the push upwards. I take 20pts off the table and wait for the next trade.

So what’s my point here?

The point is that I had a premise and I took the short trade, BUT I still listened to what the market was telling me, I watched the tape and saw that I could be wrong. I reduced my risk by closing half and waited. When it became clear I was wrong I didn’t need telling twice, CLOSE THE TRADE! Why wait for my stop to be tagged when I know the odds have now shifted?

My trade management rules are: Stay in the trade as long the premise remains correct OR my stop is hit OR my exit criteria/target is met.

This has saved me £’s over the years.