Momentum Price Trajectories In The Market
One night while viewing a chart depicting Ballistic Trajectories that I saw while reading an article on the internet about medieval canons, I realized how closely the daily market movement resembles the same angles and curvatures I was looking at in the graphic. It turns out that price trajectories found in the market resemble those of other solid objects flying through open space, i.e. canon balls, missiles, arrows, footballs, golf balls, frying pans.. etc. The light bulb went off in my head when I realized how important it is to understand the different market day types that can occur and how they can affect your trading.
Daily Market Profile Types
I did some Google searches about the subject of “Day Types” and found that there are all kinds of ways folks attempt to classify market day types. One Technical Analyst went so far as to break the daily price movement of the market into 17 possible “market profiles” which seemed to me a bit overkill and hardly useful to for the day trader due to the shear complexity of the classifications and myriad of possible interpretations. Not finding a straight-forward set of classifications for E-mini Day Types I decided to do my own research on the subject and so I went to analyzing E-Mini Futures Market data for the previous 5 years covering 2011 through 2015. After a week of hardcore computer analysis of over 1,300 trading days of raw market data I had the answers I was looking for. In the end, after further analysis, I came up with my own methodology of classifying market day types which are USEFUL to the day trader. Here is what I found.
It turns out, that on a regular basis, the market repeats up to 5 different DAY TYPES, each corresponding to a different price trajectory resembling those of firing a canon ball at different angles.
Here is a quick overview of the 5 Price Trajectories we see in the Market.
1.) Price Trajectory is at a 80-90 degree angle, virtually straight up, parabolic and unsustainable.
2.) Price Trajectory is between a 40-60 degree angle and can be sustained throughout the day.
3.) Price Trajectory is 30-35 degree angle and usually reverses mid-day forming a giant V pattern
4.) Price Trajectory is low and never can break into a sustainable move. Price remains trapped in Chop.
5.) Price stays trapped in low range, low volume, sideways Churn. No real movement for the day.
The chart above shows the price trajectories for UP Moves in the market. The Market displays the same exact trajectories to the downside as well. NOTE: On rare occasions we may see some days that defy any type of classification, or end up being a mixture of several of the above patterns, one morphing into the other as the day unfolds. But the great majority of the time at the end of the day, you will see a pretty close resemblance, if not an exact match to these 5 basic day type patterns described above.
So lets examine in reverse order each one of these day types more closely.
The Churn Day
The low volatility Churn Day is the rarest of the Day Types occurring only about 2% of the time. Churn Days are characterized by extremely low volume drift action in a tight range due to extremely low market participation. Churn Days occur when the market is waiting on important news (for example when Janet Yellen is speaking in front of congress all day) or around the holiday season, Christmas, New Years when the masses are on vacation. The Market Profile folks call this a “Balanced Market” which results mainly from a lack of enthusiasm. This ends up being the dullest of the day types where the only way to score any points is through scalping and is typically has a very low risk-reward level. This day type typically prints a narrow range Doji bar on the daily chart.
The Chop Day
The Chop Day is characterized by wild price swings up and down throughout the trading session as buyers and sellers wrestle over who is in control. Volume levels cycle up and down and there is no consistent direction for the market. A Chop Day is like a lost ship in a storm at sea heading this way and that without a compass.
The V-Reversal Day
A V-Reversal day occurs when the market chooses a direction after the open, Up or Down and makes a strong move in that direction only to do a 180 turn in the opposite direction. We end up with a giant V or upside down V at the close depending on which direction the market went in first at the open. V-Reversal days can occur from a Breaking News Event causing a sudden change in Trader Sentiment or a market that is hitting a Major Technical Support or Resistance level that it turns back from.
The Parabolic Day
A Parabolic Pump and Dump Day is characterized by a Fierce High-Volume Price Explosion right from the open. The market drives higher or plunges lower with great force for the first 30-60 Minutes only to peak out and fade back on low volume. Parabolic days are typically driven by the HFT “Machines” and other Institutional Programmatic Buying/Selling Systems. They all trigger ON and pump the market hard and then after making a tidy profit they turn off leaving the market to the humans. Typically after a Pump and Dump event, the market goes flat the remainder of the day.
The Accumulation/Distribution Day
The Accumulation Day is the Strongest Market Trend Day and occurs when there is a steady, overwhelming imbalance between the Buyers and Sellers. Buying pressure is typically 3-5 times greater than selling pressure and never lets up throughout the session. More market participants BUY and HOLD for larger intra-day moves as well. Accumulation Days result in LONG RANGE UP DAYS.
The Distribution Day (exact opposite of the Accumulation Day) is another of the Strongest Market Trend Days and occurs when there is a steady, overwhelming imbalance between the Buyers and Sellers. Selling pressure is typically 3-5 times greater than buying pressure and never lets up throughout the session. Market participants may unwind big positions in anticipation of a market sell-off and the SHORTs are HOLDING for larger intra-day moves as well. Distribution Days result in LONG RANGE DOWN DAYS.
Day Types Breakdown By Frequency And Profitability
So How Does This Day Type Analysis Help The Emini Day Trader?
The market is a gigantic dynamic puzzle – throwing us curve balls when we least expect it, or at other times doing exactly what we want… just not WHEN we want it. As Day Traders we cannot force our hopes and desires onto the market, we can only adapt to what the market gives us, but that requires that we are able to recognize WHAT the market is serving on a platter to us at that point in time. Being able to successfully identify early on in the session what type of day may be developing can help us immensely in throttling our levels of trading aggressiveness during the session and maintaining realistic expectations on what can be achieved.
When the market is flat-lining, and we are experiencing a low volume churn day for instance, the traction is so low that the likelihood of good follow through on trades is nill. This is a good day to either sit on the sidelines or trade extremely light and quit at the first failed trade. On the other hand when the market is in a rip-roaring, high momentum Accumulation or Distribution Day we want to jump on board that freight train at all costs and ride the rails as long as we can. To make serious money day trading the futures market you have learn to hold your trades for bigger targets. As momentum traders we can only do well when there is EXPLOSIVE and SUSTAINED movement in our favor. You should be able to easily see it on the graphics above. Parabolic Days, V-Reversal Days, and Accumulation/Distribution Days are the most likely to give us sustained traction in one direction. The other 2 day types which account for 38% of the time, will not.
In day trading we do not “play” directly against other traders – we play against the market environment which is CREATED by the sum total of the market participants at that point in time. The market is a gigantic feedback mechanism which dynamically reflects the mood of the players. If the commitment of the participants is Strong and united in purpose, the market will create an environment that is conducive to high sustained traction. If the commitment is weak it will be reflected in lack of control and low follow-through.
It can all be summed up succinctly…
Only Play Hardball On High-Traction Day Types – Keep Your Expectations Minimal On Low-Traction Day Types.