Trading small range days is tough and usually unprofitable. This email from Gregg prompted the analysis and today’s video:
“Barry, Is there anything that you look at early in the day to help you determine whether we are likely to have decent range and volatility during the session?
Being able to determine low range cyclical days early would be very helpful. Thanks for your insight. A happy customer.” Gregg I.
There are 4 rules-of-thumb in the video and article below – including one avenue of analysis that proved unfruitful. Ground breaking stuff? No, just solid advice and backed up with data.
1. If yesterday’s range was big, today’s range is likely to be small
The chart above shows 10 years of Emini data. Because of the large change in volatility over the years I’ve use a ratio metric to compare yesterday’s, today’s and tomorrow’s range. The data shows there is an inverse relationship between today and tomorrow. That is, if today was a big day, tomorrow is likely to be a small day. And vice versa.
2. If first 10 minute range is small, the day’s range is likely to be small
The next avenue to explore is what the first 5-15 minutes of trade can tell us. The chart above shows Emini data for the last year. Here there is a direct relationship between the range early in the day and the range for the full day.
So, if the first 10 minutes of trade is quiet then the whole day is likely to be quiet and low range. Although the chart shows data for the first 10 minutes, the exact same pattern exists for the first 5 minutes and the first 15 minutes. And although I didn’t do the analysis, I’m sure the same relationship holds if you measure volume traded during the first 5-15 minutes of trade.
Now, combining Rules #1 and #2 we get a powerful way of identifying small range days, with a high probability:
If yesterday was a large range day and today starts off being quiet with small range, then there is a high probability that today will be a small range day and should be avoided.
3. Xmas is about the only time of year you should avoid day trading
Next, are there any particularly quiet times of the year, when day trading should be avoided? Everybody has heard of the “Summer doldrums” – where the stock market activity and trading volume goes way down. The chart above shows the data for the last 10 years with each week of the year, numbered from 1 to 52 or 53.
Well, it turns out that the average daily range throughout the year is about 16 Emini points and only dips down to 10 leading up to Xmas and between Xmas and the New Year.
I wasn’t sure whether the stock market meltdown between March 2008 and February 2009 was artificially bumping up this average daily volatility. So in the chart above I excluded this 12 months of trading data. The conclusion remains the same. Average range throughout the year is above 12 points with the only time of year to avoid being around Xmas.
4. Avoid the lead up to long weekend holidays and Fed days
The last rule-of-thumb is pretty obvious. The day before a long holiday weekend is going to be pretty quiet – with traders getting ready to leave town, etc. And then on Fed announcement days, the market goes quiet for several hours before any announcement.
The chart above shows a typical Fed announcement day (9 July 2014). The Emini was pretty active for the first 30 minutes of trade with a high to low range of about 7 points. But then after that, everything went quiet until the Fed released their notes at 1pm Chicago time (2pm New York time). After the release volatility explodes – usually more than on this day shown – but it can be tricky to trade.
Average trade size didn’t have any predictive value for the day’s trading range
Lastly, an avenue of analysis that didn’t lead anywhere. I looked at average trade size as a predictor of future market volatility. The chart above shows today’s average trade size didn’t help identify if tomorrow as going to be a small range day or not.
And lastly, the chart above shows average trade size during the first 10 minutes of trade. Again, no help in spotting small range days early.
So, how to trade small range days?
After I put the video above out, I got this question from Lawrence:
“Hi Barry, Fantastic post on avoiding small range days. I was struggling yesterday trading FOMC day and was planning on doing some analysis on volume for such days. Luckily, your post today confirms my observations and saves me the work!
I know you aim for 4 point winners, however, given small range days, do you change your strategy in any way? i.e. aim for two or three 2 point winners instead? Cheers” Lawrence
My advice would be this. Don’t trade them at all. The most common way to lose money day trading is to make mistakes – and you’ll make more mistakes on small range and quiet days. So best to avoid them altogether.
However, if you’ve stared trading and you’re in a position and you realise that today is going to be slow going and small range – either exit straight away or put on a very modest profit target. Maybe 1.5 to 2 points, but no more. You’ll feel really proud of yourself to have stuck to your rules – and then you’ll have the rest of the day to do something different.
This article should have convinced you that you can anticipate and avoid small range days:
- Don’t trade if yesterday’s range was large and today starts off quiet. This is a combination of rules-of-thumb #1 and #2. Using these two rules together will give you a high probability chance of avoiding small range days.
- Don’t day trade before and after Xmas. About the only time of year that we have average daily ranges down around 10 Emini points is at Xmas time. It’s a good time to kick back and relax, bad time to day trade.
- Avoid the lead up to long weekends and Fed days. Do like the Professionals on long weekends – go home early. And on Fed days, wait until the announcement. No need to second guess the Fed or how the market will react.
- If you’re in a trade and realize that today will be quiet, reduce your profit target. Or get out straight away. Sometimes the small early loss is a lot easier to take than a drawn out campaign just to get to break-even. Especially if the market is not co-operating.
I hope you found this article about trading small range days helpful.
Reader comments on ‘Small Range Days’
“That was one of the best, simple, strategic way to gauge what might be happening. I can’t recall anyone providing that kind of analysis before. Thanks Barry.” Paul M.
“First off, thanks for the video on predicting/avoiding low range days. Spot on! That is something I’ve been struggling with for some time, and even tried to set up some different volume charts to try and get a better feel for where the day was headed. The info you shared is invaluable.” John J.