Intraday trading strategies with Peter Mathers.

The Share Price Index (SPI) is Australia’s day trading table. Those who have attempted to scrape their fair share off the table soon realise they need to sharpen their trading skills in all directions, and fast. In behavioural movement the SPI is similar to the NASDAQ. Both are volatile. At $25 a point, from a market that can easily move 20 points down, then 30 points up, that has got to be good news for the brave.

The SPI traded on SYCOM has an open interest of around 200,000 contracts. On a low- volume day it trades less than 10,000 contracts; on a more interesting one around 20,000. There are also Block Trade Facilities (BTF) with minimum lots of 200. They do not affect open/high/low/volume but will be reported in Sydney Futures Exchange data. There is also Exchange for Physical (EFP). This facility helps bring larger orders to market. It is mainly used by arbitrageurs and fund managers who are taking advantage of price anomalies.

The SPI has four contract periods each year. Open interest positions may be rolled over into the next period. For the day trader this can be a very choppy experience that is best avoided. Contract expiry months are March, June, September and December, with trading contracts expiring at 12.00pm on the third Thursday of the settlement month. Hours of trade are 9.50am to 4.30pm, then 5.10pm to 7.30/8am (US non-daylight/daylight saving). The night session trades only around 1000 contracts, being liquid poor. If you are holding SPI contracts or CFD contracts the reopening at 5.10pm can at times take out a few levels of stops. A few hundred contracts could spike the price significantly.

Even though markets have a price value they tend in the short term to move emotionally. Both the market psychology and your own psychology need to be very well understood to trade this market. An understanding of key market numbers is useful. I use the TradingLevels™ as key numbers in a micro and macro way. Many large firms have their own models to assess values of the ASX200, such as earnings per share/bond yield and trade to those models.

What follows are a few ideas about short-term intraday strategies that are easy to implement and stick to. Large players use this market to hedge positions or buy cheaper index futures at certain times over stocks.

Since BHP Billiton and Rio Tinto can account for half the points’ movement of the ASX200, an understanding of volume moving in and out of these larger stocks is useful. Undisclosed orders in BHP will affect the SPI. Reading the market depth of these larger stocks is handy, as reading the depth of the SPI is more difficult. It’s better to read the course of sales in the SPI. Understanding what influences the SPI, and by how much, will refine your trading. My style has an element of the discretionary to it, because I like to understand the market.

Finding your feet

The Robo method, illustrated in figure 1, is a mechanical trading style, perhaps a good one for beginners. Ten-minute bars are shown. Once the first bar is in place, the idea is to buy the high or sell the low of the first bar, then place the stop above or below the previous bar and, in this case, just keep lifting the stop under the bar. The stop can also used be to reverse the position. The idea of the game is to stay with the direction of the market. This is a good method to catch the morning and afternoon run on the SPI. The Robo method is complete in that it has a clean set of trading rules about entry, exit and trailing stops; it’s a package deal that keeps you in the trend. You could even add to the position on new highs. This method closes out your opinions and emotions and tracks the trend, enabling you to manage risk effectively. It’s a simple, logical approach that will develop healthy habits for the new trader.

The call of the time

Short-term strategies are normally completed within five days, catching the trend hype. If you are trading intraday, different parts of the day need to be understood. The SPI is essentially based on the Cash Market/ XJO/ASX 200, all of which trade from 10.00am to 4.00pm (360 minutes, for the Gann traders). The SPI opens at 9.50am, ten minutes before the Cash Market. On average the SPI will move only in a 10-point range in the ten minutes before the Cash Market opens. I say this so you can isolate this period and observe it.

As a strategy that breaks all the trading rules, one could set up a profit target of five points from the open and place a stop ten points away, with the direction chosen based on the metals
market. The Cash Market closes at 4.00pm and the SPI trades on to 4.30pm. During this last 25 to 30 minutes the market moves quite differently from the rest of the day – it moves a little like it did in the first 30 minutes of the day. Around 4.05pm you can notice the bigger fish letting their contracts go for the day. The market then starts to run very quickly but smoothly. With the Robo method on a two-minute chart you may get, on average, eight or nine points. It pays to observe the nature of price action in this period.

After the Cash Market opens, along with the SPI, a direction forms. Many things in the bigger picture need to be understood. The basics of technicals, degree, time, and whether we are in a correction, a bear market or a bull market – these all have their own market behaviour. In a bull market, if Friday’s closing is strong, with money moving into the market, the probability of Monday being a bull day is high – and there will be profit taking on Tuesday morning. So day trading Tuesday morning could be rather choppy – better to wait for the afternoon session to resume to the up side. Wednesday is one of those days that are down 30 points in the morning, then up 30 points in the afternoon. There is a flow of money moving in and out of the market each week and you need to tune in to it.

Realistically, how many days or sessions out of the five trading days can you trade? There is also the ‘Dow affect’. What happens to our market if the Dow moves 100, 150, or 200? And the American Depository Receipts (ADRs), plus the Dollar, or BHP in the United States? How many points can we expect today? These all carry weight. Observation and familiarity will give you confidence in placing trades.

The morning session can find its high or low around 11.30am to 1.00pm depending on the amount of volume traded. You just need to observe volume flow. You will see the buildup of orders creating support. Most markets flat line for the long lunch session that stretches out to 2.30pm or maybe as late as 2.50pm, before the afternoon play begins. If it’s low volume, expect a small squeeze before the run. Intraday trading is basically two hours in the morning and two in the afternoon.

Even though from 9.50am to 10.00am the SPI moves within its range, it is from this range that the market will have its first run, and you need to read this to anticipate the direction. If the
volume is large, it will move straight off. If the volume was low enough and, say, overnight markets were up and the SPI had already crept up 20 odd points through the night, you might
think we were surely heading north. However, they need to squeeze out all the new contracts by pushing the market down first and squeezing out and triggering out all the stops. Once they have this money, the morning run up will begin – this normally takes about 20 minutes or less.

Let’s have a look how this works in figure 4. The chart is a two-minute chart. The drive down is about 20 points. It is volume we need to read and the bigger picture technically. The night before was up, and the target the market will be driven down to is yesterday’s high, closing the gap. The SPI doesn’t leave many gaps unopened. it may take a few days to close a gap, but never lose sight of the gaps on the day charts.

Figure 4 in detail

The following numbers relate to the numbers on the bars of figure 4:

1. 1300+ contracts. Half the contracts entering the market are long, the other half are short. If, as market maker, I have a 15-point stop, you know where I will be hitting the exits.
2. Open is down. Selling pressure, but less volume than 1 (need more volume than 1 to be a trend down). First few minutes is noise and realignment of positions.
3. Move down, range is smaller, volume is even less (this is not a trend down yet, but those contracts on the open are more to the sell side) staying within the 10-point average range for the first 10 minutes before the cash opens. (Robo on this chart, we have a short position here.) Premium between cash and future will align itself after the open. Arbitrageurs will see to that.
4. A move down, but the range is even smaller and the volume is even lower still. This is close to the end of this downtrend; it has been weak right from the beginning, but those 300-odd contracts are new traders going long and bigger fish chewing them up. The spread between the high and low is small. It has closed up off the low on low volume – no interest in downside for now.
5. (Robo is stopped out and the position is reversed and now long.) This bar is interesting because it has moved up swiftly and on more volume than the previous volume bar. That is the way a trend begins. However, it doesn’t have the right feel about it, because it moved too far for the volume. Shorts are getting squeezed out. There is good ease of movement on slightly increased volume, taking out the high of 2 and closing above it.
6. For a trend to be a trend we need increasing volume. This volume bar is less than the previous bar; the actual bar has a lower close. We now also have the cash market opening. Price has washed out the high of bar 5, moved down and closed near its low on similar volume to bar 5.
7. This is a key bar. What we have had so far was a bigger fish buying all the long contracts of the new traders, thinking the market was going straight up. They bought the contracts and then sat still. There were no further shorts of any significance. The market is moving down on 2, 3, and 4, a sign of no more buyers. The long bars 5, and especially 6, show nothing to the upside. There was no fight between buyers and sellers. At bar 7 there are 150 contracts placing pressure on any bulls. There was also no reaction to this blow, as the bar closed on the lows. If bar 5 was truly bullish then movement should continue up. Here we have large sellers replenishing the offer as longs start lifting the offer, so we get no ease of movement on large volume. When buyers are done the vacuum is on the down side and price closes on its lows.
8. The knockout blow to the bulls, with 150 contracts again. The market falls (Robo reversed position to short on new low with stop above previous bar; we are short all the way down to 18). These two chunks of volume that match each other are the deciding factor. This was the push, the true balance decided. If I need to sell a lot of contracts I don’t want the market to be pushed down by my selling. I want to offload without punching through any market levels. So I will artificially hold up the price through market depth so it looks as if there are buyers waiting in the queue. Then I will let them come to me and lift my offers, or if there are enough bids I will start hitting the bids.
9. Is on low volume, as the larger fish wait for natural new entries to the short side. Same as bar 8.
10. Increasing volume to the downside. This is a trend, as the current volume bar is more than the previous volume bar; the range of the price bar needs to be absorbed into the reading as does the open and close. Each piece of the five bits of data has a story to tell. Bar 10 has good ease of movement down with a close of the lows indicating some buying.
11. More volume, bar closes on low. (Robo is bringing trailing stop down above each price bar. Place the new stop first, then remove the old stop.) Bar 11 confirms the down move with a close on its low.
12. Hesitates as new low is chipped away at as last resort of support for the bulls (low of bar 4).
13. Unlucky 13 for the bulls; support is broken, bulls bite dust.
14. Price bar has good range that balances the incoming volume. This volume is coming in fast. It is all the stops being triggered by the computers. Snorting bulls stare at loss. This is the attention grabber. There is good ease of movement down, but the volume is the highest since the open sellers were selling. Buyers are causing friction, ready to slow the process by now entering the market.
15. Stops being triggered and new traders decide short was the right move after all, with the volume to match, the subtle aspect of this bar closing off its low. Trends have a beginning, middle and end. The beginning and end are reasonably similar. They overlap and are small. The centre of a trend is the most powerful part of the trend, like Elliott’s impulse wave 1, 3, and 5. Bar 15 narrowing spread, greater volume and close of the low - buyers are entering the market - the line of least resistance is no longer down.
16. The mission has been accomplished; the new traders have been parted from their cash.
17. 20 points on the SPI is a lot of heat at $25 a point. There is reduced spread and no ease of downward movement.
18. The volume on 18 speaks for itself. The range on the bar explains the changeover. If you understand what has happened here, either in actual time as it unfolds, or as you see it happening, you know to buy on this volume. This is the beginning of the morning run up to midday as the volume is low. There is contracted spread on massive volume. Buyers have lifted large offers which have been following the market down. That has left a vacuum, for the sweep down below the lows of 17 and 18.
19. (Robo is reversed and we are now long.) Any weak longs are washed out by the sweep below 17 and 18, and shorts are squeezed out by the push up of bar 19. Hence we get nice ease of movement up, or line of least resistance, with bars 19 and 20.
20. I wonder where I can go for lunch? They won’t be back until 2:30pm.

Happy intraday trading.

Peter Mathers (www.tradinglounge.com.au) is a private trader and mentor who has been trading since 1982. Peter specialises in trading shares, futures and CFDs and is the author of ‘Trading CFDs in Today’s Market’. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it