How history helps your intraday setups

Here's a nice trade that set up on Wednesday morning, June 7th, 2006. It provides an excellent example of how data-driven historical analyses can be blended with a real-time feel for the market to create winning trades.

As noted on my research blog that morning, the previous day's market had displayed both a high degree of institutional selling and institutional buying. This meant that large market participants were active on both sides of the market. The blog indicated that, when that occurs, the odds of the market closing higher the next day were quite good: about 2:1. That was one of several analyses that had me leaning long early in the day.

In the opening minutes of trade on Wednesday, however, we traded to the downside. My goal was to look for a waning of the selling pressure, with price holding above the previous day's low, to take advantage of the bullish historical bias.

As the chart below shows, we got that setup:

This chart is taken from the Market Delta program, which segments volume traded at the bid vs. offer prices. This information tells us whether sellers have been more aggressive (red color; more volume at the bid) or buyers (blue color; more volume at the offer). Please note that I am not affiliated with Market Delta and do not receive compensation for mentioning them. It is a program I use in my own trading that I have found helpful in identifying intraday setups.

Let's take it step by step:

1) We hit a new low for the day on the S&P futures at the 8:45 AM bar, but then buyers emerged in size consistently lifting offers all the way up to 1264.

2) The next pullback occurred on lower volume and with less volume occurring at the bid.

3) The market tried one more pullback at the 8:55 AM bar, but this quick petered out on still less volume. We have our setup: selling has dried up at a point above the previous day's low.

4) The inability of the market to make a single print below 1262.50 emboldened the bulls, who again started lifting offers in size. Notice volume at the offer expanding as we move higher: a telltale sign of a good intraday move.

5) We want to ride the move as long as it will take us. The bottom numbers (the last of which are circled) represent the number of contracts traded at the offer minus those traded at the bid. As long as that number stays positive (color stays blue), it makes sense to stick with the trade.

The historical analyses helped provide a directional bias for trading, but the intraday analysis was crucial to the execution of the idea. It *is* possible to be a quantitative, systematic trader and a discretionary one. The best trades, I find, come from the head--and the gut.

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com and a blog of market analytics at www.traderfeed.blogspot.com. His book, Enhancing Trader Development, is due for publication this fall (Wiley).