How to Use the Right Strategy for the Right Day

11/21/2014 6:00 am EST

Focus: TRADING

Michael Bellafiore

Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading

Veteran trader Mike Bellafiore of SMB Capital shares a question-and-answer between him and another trader, which others could find helpful.

1. Trade only the most in play stocks in the beginning as they have the best chance to move regardless of market action.

2. Wait for the market to break the previous day's range or some similar range from the previous couple days' trading.

3. Establish that the market itself is in play. Is there significant economic news, political unrest, or earnings news from a major company?

I hate to bring too much of a bias about the market into my trading each day. I would rather wait and let it show me. But often, by the time it has shown me, it will do very little, and I have already been chopped in failed setups.

Of course, the risk in waiting for some of these signals may be missing or passing on otherwise good setups. I really feel like establishing a better sense of the market's daily potential and maybe some more quantitative rules for how aggressive to be will be a major step in my trading.

As always, thank you for your time and all the knowledge you have contributed to my trading.

Mike's Response
So what you are asking is: How can I tell the difference between a trend day from a range day? Wonderful job by you in understanding how important it is to understand the big picture or market structure for each trading day. Often, we lose money trading trend strategies during a range day and determine we traded poorly. We may in fact have traded that opportunity as well as we could have; it is just that on a range day, that trade is not as likely to work. This issue that you have identified is so undervalued by the discretionary intraday trader.

I love your ideas for determining whether it is a trend day. These are all spot on. I might suggest you start to look at three other ideas:

a) Are there more stocks up or down during the trading day and find how this information correlates with trend days.

b) Determine how many stocks are trading above or below VWAP and find how this information correlates with trend days.

c) Do statistical research on the likelihood that the day will be a trend or range day based upon its variables. For example, if a stock gaps up 0.6%, what are the odds it will be a trend day? If SPY gaps up three days in a row, what are the odds that the gap will be filled? We are doing statistical work like this on our desk.

You are on the right track. For certain market structure days, certain trades will not work as well. Keep working on this.

By Mike Bellafiore, Co-Founder, SMB Capital

Related Articles on TRADING