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Listen To What The Market Is Telling You (When Your Analysis Goes Wrong)

It is a good practice to come into the market every day with a game plan. Like an athlete who studies his opponent’s weaknesses and creates a game plan to exploit them, the trader can anticipate how a market will trade and locate key areas where trades are likely to set up.

But what happens when the market doesn’t do as expected?

This happened to me this morning. Based on my analysis of the market, I was expecting a pullback. I even wrote a blog post on the rationale. My bias coming into the day was bearish. I was looking for an UpThrust of yesterday’s high or a weak rally to short in the event the market started selling off overnight. Instead of displaying weakness, however, the market gapped open, up 10 points off yesterday’s close!

So, what should you do when your analysis is wrong? The answer is, “Listen to what the market is telling you.”

When a market does the opposite of what you are expecting, it is telling you something important. In this case, it was telling me that the market was much stronger than I had believed. Although the last few days had shown lackluster buying on weak volume and narrowed ranges, today’s gap open signaled that strength had come back in. Buyers were eager to buy. Whatever it was that was driving the market – news, a surprisingly favorable report, or better than expected earnings, the reason doesn’t matter. It was obvious from the price action buyers were in control.

You want to listen to the market and not hold a bias, especially when the market is signaling so clearly.

A large gap open indicates an imbalance in supply/demand and is one of the important signs of a trend day. Since the market gapped up today, you set your game plan aside and look for a long opportunity. It is like a quarterback who calls for a certain play in the huddle. When he sets up on the line of scrimmage and sees that the alignment of the defense will squash his play, he calls an audible. Traders, too, must be prepared to call an audible when facing a market that has aligned against their morning game plan.

It was clear coming into the morning that the market had rallied strongly overnight. It was trading well above yesterday’s close and high, with good momentum. Trading in the first half hour held the overnight gains and held the opening gap. A Wyckoff Spring trade set up off the support of the pre-market low and allowed a clean entry into a trending market.

Traders who can read the market well and are quick to respond can make audible calls.

Sourced from EzineArticles

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