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.
And now, what about how to trade large range days?
What does Tom Cruise and the movie “Days of Thunder” have to do with trading range days?
Range days might be psychologically one of the most difficult types of days to trade. This question from Nilesh about Tuesday’s explosive uptrend day gets to the point:
I knew I should only trade from the long side. But in the last 2 hours I took 4 trades – all of them SHORT. Only the last trade cost me, however, it’s cost me more in confidence. Any suggestions? Nilesh
First of all, what is a range day? A range day is any day where the market just keeps going, either up or down. We all know what they feel like. You’re thinking “When will this runaway move stop? Where’s the top/bottom?” Trust me, we’re all thinking it: “When do I short this monster rally? When do I buy this over-sold market?”
Psychologically you know the right thing to do – Nilesh said so in his email. You should be following. But your brain says “fade” – you’re smarter than the market, you can pick the turning point, go on, be a hero. Maybe some stats on range days might convince you.
We get 1 to 2 range days per month
7% of Emini trading days have a range of greater than 2.5% of the previous day’s close. These are large range days, either up or down. So you get on average of 1 to 2 range days a month. Note the “fat tail” at 3% or greater – classic Nassim Taleb.
Range days open near one extreme
Most of the time range days open near the low of the day if the market is going up, or near the high if the market is going down. The label on the chart is a little misleading as it looks like I’m only talking about up days. In fact the data includes both up and down days. Strictly speaking I should have said “there is a 59% chance that the open is within 20% of the extreme”.
And range days close at the opposite extreme
Now here’s the good stuff. 71% of the time the market will close very near the extreme – near the high on an up day or near the low on a down day. There’s no reason to short an up range day. Again the stats above include up and down range bars.
There’s over a 25% chance that the market will close in the top 5% of the bars range on an up day (and within 5% of the bottom on a down day)! So that’s what you should be thinking as the market screams away: “I need to buy a pullback and hold to the close”.
Range days are followed by consolidation days
Lastly, here’s what happens on the next day. There’s only a 40% chance that we’ll get another range day tomorrow. Now I should have split this data into up days and down days – I’m sure down range days are more likely to be followed by another down range day. But you get the picture.
So where does Tom Cruise come into it?
So those are the stats. Now this might sound a little peculiar – when I’m in the middle of a runaway “range” day I visualize Tom Cruise and Robert Duvall in the movie “Days of Thunder”. I hope you’ve all seen it – after all it did have Nicole Kidman in it.
Anyway, it’s about stock car racing and early in the movie Tom Cruise gets into a big crash and his confidence is shaken. Duvall takes him aside and tells him that when he sees an accident happening ahead of him, the cars will mostly likely slide down from the TOP of the banked track to the BOTTOM – and leave a clear path through the wrecks on the high side of the track.
The big race day comes, Cruise is losing to his arch enemy and in the middle of the race there’s a big crash ahead of him. There’s smoke all around and he can’t see what’s in front – but he remembers what Duvall said. “Go high. Pick a line that avoids the wrecks and you’ll get through”.
So even though there’s smoke all around and he can’t see where’s he’s going, he knows that there is a high probability that the wrecked cars have slid down from the top of the track and the safest route through is to “go high”.
That’s what I’m thinking as a range day develops – in an uptrend, get long and hold on, because the highest probability outcome is that we’ll close at the highs. And vice versa for downtrends. I’m blinded by the smoke but I know that if I “go high” I’ll be safe.
Good luck with your Emini trading.