Trader Linda Raschke: Tips On Day-Trading the S&P 500 

The S&P 500 futures market is a trading arena unto itself, which can accommodate many different trading styles, according to Linda Bradford Raschke, a well known trader, lecturer and president of LBR Group, Inc.

“Not only does this market display a different daily profile than the other futures markets, but it has a much longer “length of line” (intraday swings), which offers more trading opportunities, she said. “Additionally, there is a wealth of information provided by many internal indicators on the equities market that some professionals like to monitor.”

Below, the longtime trader provides some tips on trying to be a successful S&P 500 day trader. “However, let me also say that the majority of the professional S&P day traders I know tend to specialize in just one pattern or trade just one style. This is definitely a market where overtrading can be a temptation.”

“Swing Trading” Concepts

The principles of “swing-trading” involve applying basic technical analysis to the secondary fluctuations which occur in a market, said Raschke. “We can apply these principles to all timeframes and all markets, but they work particularly well with the S&Ps, so a brief summary is first in order.”

Swing trading is following the price action and learning to anticipate the market’s most probable course of action. “We learn to determine the immediate trend by observing whether upswings are greater or lesser than downswings. In a simplified model, we look to enter on retracements in the direction of the trend. An early sign of a trend reversal is a ‘test’ of a most recent extreme price level which usually forms a higher low (or lower high).”

A trend reversal is confirmed when the upswing leg exceeds the length of the downswing (or vice versa). If a trader enters a position on a “test” looking for a trend reversal, but does not get this confirmation, he should exit the trade or pull his stop up close to his entry price, said Raschke.

There are also periods of market rest, consolidation or low-volatility range contractions. These patterns provide an opportunity for traders who like to trade “volatility breakouts”–a methodology in which one waits for the market to tip its hand with a powerful thrust and then jumps on board in the direction of the movement. “This too, can be a form of swing trading, as we are playing only for the market’s next immediate move and not making any longer-term valuation judgments.”

“When a trader practices the principles of swing trading, he learns to develop a conceptual roadmap in his head. In the S&P market, it is particularly important to learn to think in terms of concepts because there can be so much distracting intraday noise.”

Some more examples of concepts, in S&P 500 trading, are: mid-morning trends tend to carry into 11 a.m. Central Time, plus or minus 15 minutes. The best average intraday trends tend to last 45 to 90 minutes before having a countertrend reaction. The earlier a trend starts, the earlier it “peters out.” There is often an opportunity to play off a reversal of the move into 9 a.m. Central Time, plus or minus 15 minutes. The markets tend to be more emotional at the beginning of the day, when a good move counter to the initial opening swing can occur.

“If you learn to think in terms of concepts, you can master the markets instead of becoming a slave to the charts,” said Raschke.

Time-of-Day Tips

On average, there are only two to three “great” S&P 500 intraday “legs” or swings, said Raschke. “Most professionals catch only three or four really great trades a week, if that. Most trades will often be very small wins and losses. So don’t be too harsh on yourself if you feel that you are missing the majority of the movement. Overtrading suckers one into seeing only the trees and missing the forest.”

Traders tend to be creatures of habit, and thus it is easy to compile market tendancy charts. There are several key patterns which have held constant over time, she said. “One common pattern might be the market rallies or sells off into noontime. At this point, a large percentage of the floor traders and brokers in New York go to lunch and a countertrend correction begins. When the late stragglers get back from lunch, the morning direction tries to reassert itself again.

“If the afternoon rally or sell-off starts too soon, it won’t be able to sustain itself through the end of the day. It will die out around the bond close. However, if there is an afternoon ‘shakeout’, usually between 1-1:30 p.m. Central Time, then the market can finish in a trend mode into the close.”

Raschke said not to fade a move into the last hour of the day, “for there is no time to exit gracefully if wrong. The odds suggest a better entry price the next day on the probable morning follow-through. Moves on Friday tend to end at 2 p.m., not 3 p.m. Central Time, as too many traders prefer to flatten out or even up before the weekend.

“On many days there occurs what I call the 2 o’clock jiggle. Right around the time the bonds close, there is a great 10-15 minute scalp trade. I believe it occurs as an emotional reaction to how the bonds go out. The trade usually lasts for no more than 10 to 20 minutes, but is fun to anticipate.”

Sometimes a good selling opportunity occurs around 1 p.m. Central, she said. “In fact, it is amazing how many good turning points occur on hourly readings, for example, 9:00, 11:00, 12:00. It think this is because people are more conscious of time at these moments, creating a slightly sobering effect.”

About the Author Jim Wyckoff has been involved with the stock, financial and futures markets for more than 20 years. He was born and raised in Iowa, where he still resides.Wyckoff became a financial journalist with Futures World News for many years, cutting his teeth as a reporter on the futures trading floors in Chicago and New York, where he covered every futures market traded in the United States at one time or another.Not long after he began his career in financial journalism, he began studying technical analysis. By studying chart patterns and other technical indicators, he realized this approach to analyzing and trading markets could level the playing field between “professional insiders” in the markets and individual traders. His extensive studies of technical analysis and knowledge of markets led to several positions, including chief technical analyst at several well-known companies. He says his mission is not just to generate profits for traders but to also provide them with educational and insightful information because, in the fascinating business of trading, one never stops learning. Wyckoff received a Bachelor of Science degree at Iowa State University, graduating in 1984 with a major in journalism and a minor in economics. He and his wife have two children, a son in high school and a daughter in college. When he’s not analyzing markets and educating traders, Wyckoff says he loves adventures, from driving a Jeep across the highest mountain pass in the continental United States to extreme winter camping in the Boundary Waters to hiking in the jungles of South America.

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