Trader's Daily Notebook: Focus on Your Trading System, not on Anybody's Tweets

 | Jan 12, 2017 | 7:00 AM EST
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As individual traders and investors, the greatest obstacle we generally face is our own propensity to make rash decisions born out of fear and emotion. 

We know, or rather most traders accept, that as a stock trades above a 200-day simple moving average (SMA), there's a reasonable chance that stock is in an uptrend. Some might want to add an additional qualifier, like the stock must also be at a new 40-, 60- or 80-day high. But for argument's sake, I'll assume most traders would agree a stock trading above a 200-day SMA is in a bullish uptrend.

With a little effort and a halfway-decent back-testing system, even a home-based individual trader can code a basic program that'll illustrate how a stock or index has performed once it's broken above a 200-day SMA. Add a few additional ingredients, such as a measure of volatility to determine how large our position size should be, what factors would warrant a position being initiated or exited, and an additional risk management component to tell us when a loss should be cut, and suddenly we have the makings of a trading system that could, at least in theory, be operated without the risks of intraday decisions being influenced by irrational fears or wildly fluctuating emotions. 

Have I oversimplified what it takes to develop a trading system? Absolutely. But our focus today isn't on building a trading system. It's on identifying what we can control, or test for, and coming to grips with those we cannot. As an active trader and investor, I have always felt my time was better spent focusing on things that weren't based entirely on opinion, emotion and fear. 

An investor has the ability to back-test to determine how a stock, index or futures contract has performed in the past once it's broken above a specific moving average. We can run tests to identify viable money management systems based on various measures of volatility. What we cannot test for, however, is how a stock or index will react if the president-elect or some member of Congress decides to comment on it or its industry in a tweet or news conference. 

The president-elect's Twitter behavior notwithstanding, I believe most traders are capable (and willing!) of looking at a chart of the E-Mini S&P 500 futures (Es), or any equity futures contract for that matter, and identifying which way the prevailing trend is headed. And yet I consistently receive notes from traders telling me they're not trading long because they're certain President-elect Trump is going to crater the market. That sentiment, in my view, is born entirely out of fear and emotion. 

By identifying easy-to-follow momentum rules based on one's trading timeframe, we're able to ignore such things as congressional hearings and presidential tweeting. For example, if the market is going to fall apart following the inauguration, price will have to break beneath the 21-day exponential moving average and 50-day SMA first. Once that occurs, short and intermediate timeframe participants will likely pay attention. If such a decline never happens, and the Es rallies toward 2300, then they've sidestepped some unwanted emotional baggage that far too many traders and investors are lugging around on a daily basis. 

The bottom line is there's no input in my charting software for Trump's tweets, Sen. Chuck Schumer's press conferences or any other political chitchat. If you're managing a winning position, I'd encourage you to obey your exit and sell-stop rules, rather than bail on them due to something Trump may or may not tweet about. The market's going to do whatever it's going to do. Follow price, maintain control of your emotions and avoid getting caught up in the fearful and biased rantings of folks on TV and social media. 

Moving on to Thursday's Es auction, we'll begin the session with a focus on 2264.75 to 2265.75. As long as value remains above that area, buyers enjoy an advantage and have an open door to auction prices toward 2273 and 2277. Value migration above 2273 places us back inside the accepted range from last Friday, and is not something I'd be in a hurry to fade. All trading above 2273, even if demand proves weak above 2277, is still likely to test higher before reversing. 

15-Minute S&P 500 Futures Volume Profile

Those wanting a directional pivot during the day timeframe should consider basing their trades on which sides of 2264.75 the contract is trading. While a failed trade from 2264.75 doesn't have to result in a major reversal, it will reopen the window for sellers to auction prices toward 2258.50, and trigger bearish continuation toward 2248.75 to 2249.75. A session close beneath the mid-2260s would likely fuel bearish thoughts into the long weekend, but I'd caution traders about turning too bearish too soon. With higher timeframe moving averages all pointing north, a lot will need to change over a sustained period of time before any sort of bear trend can take hold. 

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at or posted to my Twitter feed @ByrneRWS

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