Scenario Creation for Discretionary Traders

Last night’s price action provides some great lessons:

  1. On a trade-by-trade basis, the market can and will do anything.
  2. Our plan provides high probability, low risk trades over a large sample size.
  3. The better plans provide roadmaps of what should happen if the trades are working out. By the same token, they tell us when the trades will probably not work out.

To see how this operated last night, let’s first review a short history of the ES did since the March 14 low at 1258.

  1. The March 14 low provided an Spring Buy signal that projected a target to at least the Primary Sell Zone 1382 to 1396. Following a Spring, I expect the high of the Primary Sell Zone to be breached i.e. I expected the market to move above 1396.
  2. Since the 18-day swing (monthly trend, my trading timeframe) had given a confirmed Upthrust Change in Trend Pattern, I expected the market to hold below 1406 or if 1406 was breached not to accept above it.
  3. Why 1406? The 1364 to 1406 was the Primary Buy Zone of the 18-d swing. Acceptance above 1406 would project a move to 1577 to 1564. Such a move would negate the current bear scenario.
  4. The market appeared to be fitting the scenario in (2) until April1 when we had a huge day up that was followed by a 4-days of sideways low-range activity. On the 4th day we pushed into the Primary Sell Zone 1396 to 1382 and closed below 1382.
  5. This suggested we would not see a push above 1396.
  6. The market then broke. In the process we formed a Failed Auction (see ). This suggested we would at least retest the Primary Buy Zone 1258 to 1276. HOWEVER
  7. Yesterday we saw a number of signs that throw doubt on the 18-d Bearish Scenario. This doubt comes into play if we breach 1396 before we accept below 1308 (bottom of the Value Area.). The signs of strength were:
  • The Market broke to the Point of Control 1328 and bounced. In the process it accepted above strong intra-day resistance at 1353 to 1354.
  • A breach of 1396 before we accept below 1308 is very bullish; it projects a move to at least 1416 (Figure 2). Since this is above 1406, we can say that if yesterday’s price action is confirmed by a breach of 1396 before acceptance below 1308, the market is expected to go to 1577 to 1564 – in turn this would invalidate the current Bear stance.

One lesson that I learnt from Pete was to form scenarios of how the market should behave if my view was correct (e.g. the April 1 short). Over time, by doing this, I learnt to ‘see’ what the market could look like if I was incorrect. Last night was a good example of both. But this lesson was not the only benefit delivered by last night’s price action.
In addition to the above, last night’s price action afforded a number of lessons:

  • The failure to cover the open-gap was a sign of strength.
  • However the resulting move up until around 3:00 PM EST exhibited a weak structure in terms of volume and price range. Sometimes when the gap is not covered, that sort of price action indicates a breakdown after 3:00 am. EST.
  • Once the market began moving up, around 3:00 PM EST, the Market Delta showed exhibited 1-timeframe volume profiles: these exhibit volume profiles that discourage contra-direction trades.

What happend to my shorts of April 1? I covered them at 1355.25 for a small profit. But I did not exit well the next trade so well.

Normally I don’t trade the middle of congestion; but last night when the market gave an Upthrust Sell on 15-minute chart (and given the lack of volume and interest to head North at the time), I sold small size at 1357 with an intention of exiting at 1360.75 if the market showed signs of heading North at 3:00 PM EST.

I also placed a stop at 1367.75 – the price beyond which I was not prepared to accept any further losses for this trade, in this context.

When the market broke to the upside, I kept missing the exit price by a point or half-point. I did recognize the move as one- timeframe and usually I just exit at market. But last night, I kept trying a limit order. I eventually got stopped out. The difference between early exit and my stop out price was probably three to five points – nevertheless I rated the exit as a poor one and gave myself a rating of 1.5 for the trade (1.5 entry; 0 for exit). In today’s journal, I reasoned that I was rusty given that I had not traded for over 14-days. The remedy to this is greater time spent in pre-visualization.

So you see, last night held many lessons.

Figure 1 as the Market Profile Zones.

Figure 2 shows the retracement equivalent to the Market Profile Zones – the Primary Zones line up but not the top and bottom of Value. In the event of a conflict, I use the Profile Zones. Note that the 66.67 level (1353) coincided with intra-day resistance even though the top of value via the Profile is 1370.


Figure 1 Market Profile


Figure 2 Retracements and Projections

5 thoughts on “Scenario Creation for Discretionary Traders”

  1. Ray

    I should avoid high risk trade for ES last night but having been away, I just wanted to get back into the swing of trading.

    Then having put on my stop, I turned in instead of monitoring to see if the gap up would push upwards around 3 am Singtime.

    When still slightly jet-lagged, it is better to abstain in future! A lesson to add to many in my journal.

  2. Hi Ana
    Welcome to my world of fatigue. As a pilot, I am perpetually changing time zones, and working odd hours. Sometimes it works in well with trading, other times it conflicts.
    There is always the nagging feeling of missing out, but the constant knowedge that there will be other trades.
    Managing sleep, food intake, exercise and hydration play a larger part of keeping up to speed than most people realise. Giving yourself an honest rating on each level before commiting to a trading day, can save you some anguish later. Sometimes the hardest decision is to decide to do nothing.
    In the clear light of day, when you have had a good night sleep, it can be very easy to say ‘why didn’t I see that coming’.

  3. Arigato, Stuart-san!

    You are absolutely correct: doing nothing is the hardest thing to do.

    What you said overall will be added to my Psychological Journal.

    Here is more from Ruth Barrons Roosevelt:
    You may also want to change your self-talk. In her book, Overcoming the 7 Deadly Sins of Trading, Ruth Barrons Roosevelt lists some supportive beliefs that may help control the need for extreme perfectionism: “I do my best and my best is enough. Trading is an imperfect art and science. The future is unknowable, so I don’t have to accurately predict it. I can forgive myself and still improve.”

    Being a Virgoan, this is not easy for me!

    BTW do visit my IDkit at

    Bon voyage

  4. Hi Ray,

    You mentioned you rate ur entry/exit, by what criteria should we go abt this?

    What abt trade management, do we rate it as well?

    In scenarios planning, S&P could very well have an acceptance of 1416 for monthly close and sell all the way back to 1253. How do we approach in such a case?

  5. Hi Derrick

    Q1: The rating system in the blog is the one I teach as a first step to disciplined trading.

    Each trade is rated for entry and exit for a maximum of 3 points. The key question is: did the entry or exit follow the plan?

    I expect to see a rating of 90% over at least 10 trades. The greater the number of trades, the more statistically significant.

    If, say, after 30 trades, I have a rating of 200, (90% is 270), I scour my psy journal to see the causes for the breaches of discpline.

    This is just one use of the psy journal.

    As far as position sizing is concerned, I use a separate rating utilizing the same idea.

    Q2: Of course it can. The market can and will do anything on a trade-by-trade basis. However, if the market accepts above 1406 (1416 in your question), then the probabilities favour a return to the Primary Sell Zone.

Leave a Reply

Your email address will not be published. Required fields are marked *