Swing trading in a high volatility environment

 Today, an alert reader asked the following question:

Michele, a quick question.


I have been reading your posts regularly for a few weeks now and was curious...


"How can I take advantage of your great analysis if I am unable to trade outside of market hours?


Specifically, gaps on market open usually kill me as I have no way of knowing what direction it will go.


For example:


- Gap up, fill gap going down


- Gap down, fill gap going up


- Gap up, continue up (uh, today)


- Gap down, continue down


Some of this probably makes no sense since I am not sure exactly how to ask the question...


Also, since I am not trying to day trade, but swing trade. The current market is making swing traders day trade because of the near daily reverses in the market... it is exhausting.


Thoughts?"

Well one of the advantages of being a night owl is that I always completely ignore the first hour of trading.  I have to - I'm asleep (hey you gotta sleep sometime).  The first hour is simply too chaotic (IMAO) to place good swing trade entries or exits.  When I first started trading, I used to get up early and be rarin' to go, counting down the seconds to the opening bell.  Then I'd start placing trades.  And I'd invariably end up getting my head handed to me.

So I stopped trading that way.  Instead of trying to day trade off the open, I switched to swing trading, holding positions anywhere between a day and a few months.  This also has the advantage of not having to worry about the pattern day trading rule.  That's not an issue for me now, but it was when I started out.

Instead, I place my most of my stock trades around noon, once the direction for the day is established, or right before the close.  That seems to work better for me.  Once I started doing this, I stopped losing money.

I trade ES differently though, and I have to ask about your statement that you are "unable to trade outside of market hours"  Why is that?  If your broker does not offer extended hours or overnight futures trading, then you need a new broker.  Or is there some other reason?  I place my ES trades anytime after the close, usually very late, like around 1 AM, but sometimes around 8 PM.

I've been documenting this in my "ES Fantasy Trader" section which I started last month.  I call it the "Fantasy" trader because I'm trading 10 contracts at a time, something I can't do for real.  But this seems to do pretty well (so far, knock on LCD flat panel).  Here's what will appear in tonight's daily post: 

"The ESFT closed out last night's trade today at 1187.25 for a 21.25 point profit, or $10,625. Account total now $138,375 since inception with $100K on 8/18 after 10 trades; 7 wins, 3 losses."

The ESFT makes money by capturing the large moves that occur in the opening minutes of the trading day, without having to place bets during that time.  I exit trades during the day once the major move is over.  It's like riding a roller coaster: you get on and off at the station with the cars stationary and level.  You don't try to jump on or off when the thing is screaming down a hill at 90 mph.  So far, I've got a 38% gain in three weeks.  (Past performance, future results, blah blah disclaimer).

But that begs the question of how to use my calls to trade stocks during the regular session.  My best answer would be that, once the first hour has gone by and the dust has settled, if I'm looking for a higher close, you might be looking for an intraday pullback as a chance to go long, and vice-versa.

For example, last night I said we'd go higher today.  I've had my eye on Intel and AK Steel lately.  Here's my trading for the day:

BOT    100    INTC    Stock    19.99    USD    ISLAND   12:37:42

BOT    100    AKS     Stock     8.72    USD    SMART    12:55:55

They're both up right now from where I got in (knocking again on the LCD).  I'm going to hold these until I get technical sell signals.  I left some money on the table by not buying at 9:30 AM, but I also reduced my volatility risk (which is something to consider when the VIX is north of 30!)

So I guess the bottom line is don't worry about gaps up or down right out the gate.  Let the dust settle and then jump in on the side of the daily market bias.

As far as your comment that  "The current market is making swing traders day trade", I have to disagree.  No one is making you trade.  The higher the VIX goes, the less I trade.  Today is the first trade I've made in two weeks, and I'm not feeling all that good about doing it.  But you're right about the effect of the VIX on swing trading.  My response is not to shorten my trades, but to lengthen them.  Day trading is too hard and too risky for my taste right now.  I prefer to wait out the crazy daily ups and downs and wait for longer term moves in an environment like this.  Patience is the key.

Well I didn't really mean to be so long-winded, but it's an important topic that touches on points I've been wanting to discuss anyway.  Thanks for the opportunity..  I just hope that answered your questions.