Tuesday, 18 May 2010

The Importance of Context

Context is of prime importance when looking at putting on a trade. The same so-called setup will behave totally differently in different contexts and accordingly, you would take it in one context but not in another. This is why the same setup works sometimes and doesn't at others.

Today was a prime example and I couldn't resist writing my post on the subject and illustrating my point with today's chart.

Lots of traders, including me, love the Gap Trade. The Gap Trade for the uninitiated is an ES trade where the RTH open is away from the previous day's RTH close by more than a couple/few points and a trade is entered with a view to the gap being closed - price going to the previous RTH close. Why this happens? I'm not sure but it has become a "self fulfilling prophecy", most of the time. At least you can be sure that on most of the occasions there will be enough people going for it that the first swing should be in the direction of the gap.

Today the market in RTH opened at about 1144.00 with yesterday's RTH close being about 1134.50. The market for the 3 hours before the RTH open was trending upwards making the gap.

Today I didn't sell the gap but bought the market at 1142.50 as there were single prints left over from the 14th directly to the left of where today's RTH open was. I had a buy setup according to my trading plan. My buy price was against the bottom of those single prints. I scaled at 1144.50, 1146.50 and out of the balance at 1144.50 on the way down.

Next trade was towards the gap, a short at 1142.75. I traded this down 2 points to the top of the single prints of yesterday. I sold it again at 1142.50 hoping for a trip to fill the gap. I scaled at 1139.50 to keep my discipline, looking for value to be accepted there. Market kept on bouncing out of there and I was watching the day's DVA and the day's still single prints above. This is the stuff that needs to be recognised when trading within context.

It took about 1 hour and 20 minutes for the gap to be closed. Of course by then we were into the VA of the previous day and a whole new context was in play.

And so it goes ........


  1. Your single prints for the open might have been a self fulfilling prophecy as well :) The only thing that held the market up was the overnight point of control at the 4275 level. When they through in the towel it was if the ship sprung a leak.

  2. Very helpful summary today EL. Thanks!

  3. Hello Tom,

    I noticed that your cumulative delta has changed. Can you explain the difference between the 9 period EMA and what you are using now? Why do all the bars face the same direction?


  4. Tom,
    How much time will it take a person who is willing to put in the hard work and the necessary screen time take to become CP using the methods taught at the training?

  5. Art, no real change, just looking at a different view. Changing sensitivity sometimes shows strength of trends. I trade with my usual standard setup.
    Marco, it mostly depends on you. Learning to manage yourself is a very big part of the puzzle. There is emphasis on this in the training.

  6. Hello, Tom, i would like to ask if you ever had entered trades without the retest of EMA? I'm talking about setups like today's long trade which occured at the ~ 11.31 london time. Would you had entered long on 1109 or waited for the retest and then long? Maybe there is some diffirence between the fall ant the rise: you will wait for the retest in the fall and not in the rise because of psychology difference of market paricipants in bull/bear markets? Oh and i see that the trade nr. 2 from the yesterday was immidiate trade without the retest, so could you mention why?