Profiting from Price Action in Treasury Notes: Every Bar Tells a Story. Some Stories Are More Interesting Than Others. in the Treasury Markets, You'll Find the Most Profitable Ones in the Morning Price Action
Brooks, Al, Modern Trader
Some successful traders only trade during the first hour or so of the trading day. The reason is simple. They've found that 90% of their profit comes during that time period. Therefore, the extra effort to trade throughout the day isn't worth it and, even more important, drains energy and puts them at risk of not being sharp the next morning.
No question, the best time to trade is the first hour or two. The moves tend to be large and the signals are often clear. However, the difficulty for many traders is that patterns often develop too quickly to instill confidence. One way to gain confidence is to simplify your analysis. You can do this by looking for variants of three patterns: a trend from the open (first bar or first few bars), a breakout pullback and a failed breakout.
Before we get to examples of these patterns, let's first review some basics of price action trading. This is a day-trading approach that relies on five-minute charts. The only indicator is a 20-period exponential moving average. The strategy is effective in E-mini S&P 500 futures, stocks, options, forex and, as demonstrated here, 10-year Treasury note futures.
The strategy enters on a stop at one tick beyond the signal bar. For example, if there is a buy setup, a buy stop to go long is placed one tick above the high of the previous bar. For T-note futures, a typical initial risk is six ticks ($93.75 per one-lot). However, if the bars and the average daily range are large, it may be appropriate to risk more or trade fewer contracts; often, the profit target on the scalp portion of the trade also is increased.
At the close of the entry bar, the stop typically is tightened to one tick beyond the entry bar. After taking a scalper's profit (four to eight ticks) on part of a position, the stop is moved to roughly breakeven on the swing portion of the trade. For most trades, if you pick the correct entry, the market immediately goes your way and does not come back to let other traders come in at a better price.
The previous day's price action usually influences what happens on the current day, especially in the first hour. If you use 24-hour charts, you likely will not have enough bars on your screen to see what took place the previous day. If you have the ability to set the start time of your charts, then you can pick any time between 5 a.m. and 5:30 a.m. Pacific time; this is when volume picks up (encompassing the 5:20 floor open) and more accurately represents institutions placing their bets. One effective approach is to start your charts at 5 a.m. and end them at 1:15 p.m. Pacific. The floor closes at 2 p.m. Central (noon Pacific) but there usually remains adequate liquidity prior to the electronic open for the next day.
TRADING PRICE ACTION
To get started, look at the last hour or two of the previous day's action and see if a trendline can be drawn, or if there is a horizontal or sloping trading range. Then, as the current day's bars form, look to see how they relate to the pattern from the prior day.
In "Range to gap" (right), a previous-day large trading range preceded the current day's gap down, creating a breakout below the range. One way to view a gap on the open is as a single invisible bar, so a gap down can be considered a bear trend bar. A gap often results in a trend in either direction, but the larger the gap, the more likely the day will continue in that direction.
The first bar of the current day was a bear trend bar (a close below its open), which indicates that the bears owned the bar. At this point, look for evidence that either the day could start to trend up or down from the first bar. Alternatively, there will be a pullback into the gap and then the bear will resume. This is a breakout pullback short setup. Finally, the breakout could fail after a few bars down and then trend up (a failed breakout).
The second bar had a bullish body, but it had an unremarkable range and it closed in the middle, indicating that the bulls were not strong. …