CHAPTER 1
A Three-Frame Day For the longest time as a commodities position trader, I was confused by day trading, especially day trading the S&P 500 futures contract. The lengthy trading period of nearly seven hours was itself an impediment to understanding the price action. The day's trading behavior patterns and events often seemed strung together at random, encouraging the deceptive practice of attributing trend direction to unfolding news events. There was no making any technical sense of it from one hour to the next. But it cleared up almost immediately when I began to view the day as divided into three separate and distinct trading sessions: the 1st Frame, the Midday Frame, and the 3rd or Last Hour Time Frame. These are just names. In truth, the periods don't last for exactly the same time each day. The 1st Frame of the day can last about 1 hour and 45 minutes, give or take about 20 minutes. The Midday Frame can last anywhere from about three to about three-and-a-half hours. And the Last Hour Time Frame gets whatever is left over, occasionally not distinguishing itself at all. Although traders often refer to this third period as the “last hour,” I have found it to begin earlier and extend longer than the last hour of the trading day. To be of any practical use, however, these time periods should be treated as fixed. In that way, a rule-based approach can serve to compare daily action in the transition windows from one period to the next. Each of these three main periods of the trading day does, in fact, have a flavor and unique character all its own. Because price action actually changes in character from one period to the next, and does so fairly consistently, different
methods to trade these different behavior periods serve better than a one-size-fits-all plan. Rules can be devised based on the differences between these time sessions, and thus can help reduce one's temptation to introduce into trade entry decisions the intuition that rules of a trade plan are designed to eliminate. So for purposes of establishing a time reminder, and a trigger to implement a different phase of a trading plan, the 1st Frame of the day for the equity indices starts from the cash opening of the New York Stock Exchange at 9:30 A.m. and lasts until 11:15 A.M. ET. The Midday Frame picks up at that point and extends to 2:30 P.M. And, thereafter, the Last Hour Time Frame of the day starts at 2:30 P.M. and extends until the futures close at 4:15 P.M. ET, 15 minutes past the NYSE cash equity close. An important thing not to confuse about these three time periods is the association with trend. Going from one time period to another does not necessarily mean a change of trend, although it can. Instead, it is better to understand the transition from frame to frame in terms of resolution, momentum, price action, and complexity of pattern. Often, one time period can be said to be a resolution to the one preceding it. The 1st Frame of the day is usually the more volatile, and thus the Midday Frame tends to consolidate what was accomplished in the earlier going. If, instead, the 1st Frame is corrective and overlapping in pattern, more like a consolidation pattern, it usually resolves itself early in the Midday Frame by a sharp breakout into trend. However, when analyzing the relationship between the first two frames, the latter pattern occurs less often. The 1st Frame is usually the more volatile and trending, and the Midday Frame tends more to consolidate or even just chop around. If the Midday Frame builds a consolidation pattern, it will usually resolve itself in transition to the Last Hour Time Frame, beginning around 2:30 P.M. ET. If the trend in one period is destined to continue into the next, it will often accelerate in transition. If a trend had already accelerated within one time period, the next period may see a slowdown and even become choppy. Reversals can come in the middle of any period, but the momentum and the direction of such a reversal is more likely to change around 11:15 A.M. or 2:30 P.M. Short-term reversals are especially common at 10:30 A.M. and 12 P.M., and are thus also worthy to be included as designated Time Markers, but the transition of momentum and price action is better represented at the specific Time Markers of 11:15 P.M. and 2:30 P.M. ET. Marking at least these two Transition Times on your own charts every day is a great exercise. Watch how often the market action seems to call for
either a trade exit or entry as they approach. (See Figures 1.1 and 1.2.) Figure 1.1 Transition Times