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As of 9:00 pm ET on Thu 25 May 2023, S&P e-mini futures are -0.18%. If this holds up pre-market tomorrow, we're likely set for a pullback in SPY.
Above, I've drawn what I believe are the critical price levels for 0 DTE trading. It's possible that SPY will bounce on the dashed green trend line, but I suspect that it's more likely that the horizontal purple line ("Important") will be the real battleground.
SPY hasn't been moving very much, so tomorrow could turn out to be a not-so-great day for 0 DTE trading. What we want to look for tomorrow, ideally, is a large, powerful move that pushes against a major resistance line, and fails. Should that happen, it would make sense to try a Long Put. Try not to spend more than $150.00 on a contract.
If the price action tries to break above the orange line, but fails, and then gives us a LARGE and SUDDEN red candle, we'd want to enter with our put. If, on the other hand, the price drops to the purple line, but holds, and pushes up with a LARGE and SUDDEN green candle, that would be our trigger to enter with a Long Call.
I would use a striking price that's about $1.00/share OTM, but no more than $2.00/share.
- Important: Unless there's at least a $2.00/share swing high or swing low, don't trade this time. Remember: we need a trending SPY, not a choppy one, or we'll almost certainly lose money.
- Use RSI to guide you. You ideally want to see a powerful swing high or swing low, perhaps some consolidation, and then a LARGE and SUDDEN red or green candle to trigger an entry. If RSI is above 70.00 or below 30.00, this should give you additional confidence to enter.
- Look for high-level patterns, namely the Double Top or Double Bottom, to confirm your thinking about potential entry.
- Try to wait at least 15 minutes after the open before considering a move. We want to give the market a little time to settle after the opening moves.
- Enter near the support/resistance lines, not somewhere in the middle between them.
- Horizontal lines are far more important than sloping trend lines, such as the dashed green line. Trend lines get violated frequently.
- Target a 10% to 20% gain, depending on how conservative you are. (We're not trying to make a killing, just see if we can achieve some consistency with positive expectancy, i.e. an edge.)
- Use just a single put or call contract. We're just trying to learn to ride, not make a killing—yet.
- If you're ever in the red by 20%, exit immediately. Do not hesitate. Some trades will fail. Don't make this worse by holding and hoping, or you'll go to $0.
- If you enter and the price action flatlines, don't stay in for longer than 30 minutes. Just exit and live to fight another day.
- Fire up TradingView and look at how FTSE (the UK's S&P 500, but with only 100 companies) is doing. Since they start trading before we do, seeing how their market behaves can give us a clue as to what we might want to plan for. It can help to clue us into a likely direction. (As with any single factor, there are no guarantees; we're just trying to compound as many probabilities in our favor as possible.)
- Most of the macroeconomic catalysts for tomorrow will be released one hour before the market opens, so we won't need to worry about macro-driven unpleasant surprises mid-day.
- Unless you see a clear setup near a major support or resistance line, don't trade. Only trade after a sudden and extreme move happens, so as to try to exploit mean reversion (i.e. reversal). This will maximally tilt the probabilities in our favor.
- Whenever possible, prefer a Long Put over a Long Call play. It's generally easier to walk down a mountain than up it.
- Don't let a green position turn red!
Finally, a poll:
- Keep posting these (if so, please upvote); or
- Go and jump in the river (in which case, I await the hailstorm of downvotes)?
If you run a trade, post your results and let's analyze to see what went right or wrong.
Good luck, boys!