The Importance of Context

Context is of prime importance when looking at putting on a trade. The same so-called setup will behave totally differently in different contexts and accordingly, you would take it in one context but not in another. This is why the same setup works sometimes and doesn't at others.

Today was a prime example and I couldn't resist writing my post on the subject and illustrating my point with today's chart.

Lots of traders, including me, love the Gap Trade. The Gap Trade for the uninitiated is an ES trade where the RTH open is away from the previous day's RTH close by more than a couple/few points and a trade is entered with a view to the gap being closed - price going to the previous RTH close. Why this happens? I'm not sure but it has become a "self fulfilling prophecy", most of the time. At least you can be sure that on most of the occasions there will be enough people going for it that the first swing should be in the direction of the gap.

Today the market in RTH opened at about 1144.00 with yesterday's RTH close being about 1134.50. The market for the 3 hours before the RTH open was trending upwards making the gap.

Today I didn't sell the gap but bought the market at 1142.50 as there were single prints left over from the 14th directly to the left of where today's RTH open was. I had a buy setup according to my trading plan. My buy price was against the bottom of those single prints. I scaled at 1144.50, 1146.50 and out of the balance at 1144.50 on the way down.

Next trade was towards the gap, a short at 1142.75. I traded this down 2 points to the top of the single prints of yesterday. I sold it again at 1142.50 hoping for a trip to fill the gap. I scaled at 1139.50 to keep my discipline, looking for value to be accepted there. Market kept on bouncing out of there and I was watching the day's DVA and the day's still single prints above. This is the stuff that needs to be recognised when trading within context.

It took about 1 hour and 20 minutes for the gap to be closed. Of course by then we were into the VA of the previous day and a whole new context was in play.

And so it goes ........