Reading the Trading Environment - Inside Day

How many times have we started the trading day, expecting this clear, smooth, price action wave, that we can just ride off into the sunset?

Instead the market gave you this. Frothy, choppy, seemingly directionless crap.

An important part of a trading routine should include an analysis or evaluation of the current trading environment. Can this change as your trading day progresses? Of course. However, it is helpful to have a checklist that you can reference, to help you determine what is the current market situation and has it changed.

One tool that I use as part of my morning pre-trading routine (7:30am EST), is to determine if we are trading inside or outside the previous day range. This is loaded with information. “Inside days” could be considered a breathing period for the market or a higher time frame consolidation period. These days tend to chop around and have smaller range of movement. This can mean, smaller targets might be prudent. It also might make sense to look for trades near the highs or lows of the inside day range, since price action might just continue back and forth before continuing with the higher time frame trend:

When I notice that we are trading inside of the previous day range, I instantly become interested in the upper and bottom 25% of the range. These tend to give me the highest risk to reward, in many cases, when the level is defined with several other odds enhancers I use for entry. MACD divergences can also act as an odds enhancer near the highs and lows of the previous day range, offering a potential signal for a intra-day reversal to at least the mean of the day (defined using moving averages, VWAP or other technical methods).

Now, there are different TYPES of inside days. The example above had impulsive moves going both ways, which is one of my favorite days. Tightly, coiled up ones that are novice traps - not so much. Here is an example of when I stay out, until the market gets better flow going and at least reaches the low or high of the prev day:

Many novice traders show up, ready to ride the wave, without even knowing if it’s a hurricane that day. Not trading is part of being a professional trader. Learn to read the market conditions because risk management is our primary job as professional traders.