Traders were unprepared for Friday

Friday was a big day down in the equity indices. The Trend Percent reading for the ES was in the top 1/3 at 69%. You can check the Trend Percent for the previous trading day on the Daily Notes page:
http://www.deltat1.com/DailyNotes/dailynotes.aspx
(You may need to select 2006-04-10 from the Select Date drop down if you’re reading this after next Tuesday.)
A high Trend Percent reading means that we opened near one extreme and closed near the other. (Click on the Trend% link to see the simple formula.)

I heard about a lot of traders that got short at or near the highs of the day on Friday but only took a few points on what turned out to be a 21 point range day during RTH (Regular Trading Hours). The reason that this happened (that they only took a small profit out of such a big range without their stops being threatened) was because of the backdrop to the current market. If you look back at the preceding 3 weeks you will see that then entire range for the S&P500 is just 21 points.

What happens is that traders get conditioned with the most recent repeated pattern and this closes their eyes to the potential for a different type of move. They may have a strategy to hold onto a trade for the entire day but had probably been beaten time and again over the last 3 weeks of not achieving their targets and as such kept on getting stopped out or taking small profits.

This is understandable and frustrating. So what's the solution? Hang in there until the larger range days return? Take the hits for weeks at a time until we get our big range days? It's a tough job.

It's much easier to take a big profit when the back drop to the market is a trending market with large range days. This is because our recent memory is conditioned to this environment. Taking the same type of profit after the last 3 weeks of tight range that we've seen is much more difficult. We've forgotten how to handle that type of market.

If we have another big range on Monday then it will be easier for traders to take larger chunks of profit out of the range because they have just seen a big day and are conditioned for it.

Don’t beat yourself up for taking a small profit on Friday. Praise yourself for adapting to a changing market over the last 3 weeks and look forward to how you can rapidly adapt to changing markets in the future. How could you have quickly discovered that Friday was going to be a big range day?

Market Profile traders look at the Initial Balance (IB) in the market. The IB is the range of the first hour of trading. On Friday this was 11.5 points. Now if you look at the average range for the day:
http://www.deltat1.com/DailyNotes/highlow.htm
You will see that over the long term it is between 10 and 11 points for the ES.

Seeing the average range eclipsed in the first hour of trading is a clue that we might have a larger range day on our hands. But don’t let this fool you. If you have a look back to 27 January you will see an IB of 12 points and this was also the full range for the day. Incidentally that is the only IB so far this year that was larger than Friday’s.

My suggestion is to keep an eye on that early market action and see what is different about it compared to the most recent days. Is it exhibiting very different behavior? If so, this may be a switch in day type that we need to adapt to.

"traders get conditioned with the most recent repeated pattern"

very true, it happens to me a lot....this is why adaptability is an important characteristic to have as a trader.

One thing we need to recognize is the markets tend to go through phases.

I feel the market is now ending a phase of low volatility and stable price movement and starting a new phase of much higher volatility and larger daily ranges. What has worked the last 3 months or so is not going to work in this new phase. This is a great opportunity for those of us that can adapt quickly to this new market environment.

For me it's important to stay consistent so I always take smaller profits off the table. I trade multiples so if I can get some added mileage/profits out of those then great but I think it is so important to stick with your plan and if you catch one of the 2- 3 trend days in a month then you can consider yourself lucky. I'll like to trade with the percentages and I would rather trade as if we are trading without trending ( the other 17 days of the month), peel contracts off and tighten stops as the trade goes in your favor. It is a day like friday that sucks the amatuers in and gets them thinking "next time I'll hold on longer" this to me is foolish as we don't trend enough to adopt this mentality.....it is always better for me to assume we will not trend..

BruceM - I totally agree with your comments. Your following your trading plan, and that is the smartest and best thing to do each day. Trying to adapt your trading plan on the fly makes no sence at all.

I think what daytrader was getting at is the concept of trend traders bailing too soon on Friday's trade because the market had pre-conditioned them to an 8 point daily range in the ES. Worse yet, are those that bailed out of the trend too soon and then started bottom fishing for a reversal, which of course is a deadly mistake to make on a 21 point trend day.

My comments dovetail with daytrader's because traders that curve fit their trading strategy/method to this recent period of unusually low volatility and do not recognize or cannot adapt to a new period of more normal or higher volatility (ie wider average daily ranges) will have a tough time going forward.

All of this points out the value of experience and adaptability.