The Reaction Box

Recently I’ve been revisiting the notes that I took while reading “The Electronic Day Trader” book. This book focuses a lot in explaining you who is being the market, the market makers, and what their interests are. These market makers are the ones selling you the stocks and future contracts that you buy, and buying the ones that you sell. You can debunk the idea that you buy and sell to other traders directly. The market won’t move as fast as it is moving today, or at least is the idea that the book defends.

There is on chapter in the book that they talk about the opening and what they call the “reaction” which is roughly the 10 minutes before and after 10am NYSE time. The details are well explained in the book and I encourage you to get the book and read and re-read it to understand the concepts. By now, let’s have a look on this past week market where I’ve roughly highlighted this reaction box by drawing a box (transparent grey) 3 bars before and after 10am (the bars are 4181 ticks):

Our focus will be to see what happens after the Reaction box is closed. The simple strategy would be to get long if price breaks above the box and short if below. Let’s have a look at Monday and Tuesday:

Monday was an inside day. Price does not break neither above or below the Reaction box. There are some days that is better not to trade rather and this is one of them. Clear signal from the Reaction box.

On Tuesday, the Reaction box is immediately broken on the upside. Go Long and enjoy the ride! The blue moving average is the ALMA moving average, which is a free indicator that you can get in this site. Not bad if you just follow the rule to stay Long until price closes below ALMA.

Now let’s have a look at Thursday and Friday:

Interesting day Thursday was, price tries to break above the Reaction box but it fails with high volume entering on the highs (blue price bars) and finally price drops and breaks below the Reaction box.

“The Electronic Day Trader”suggests that whatever action occurs after breaking the Reaction box stays until noon (yellow dashed vertical line). We can see that so far this was true, especially on Tuesday and Thursday.

Friday, which always is a tricky day, follows the Reaction box breaking rule, only this time price continues falling for 20 minutes past noon. Extreme tape speed bars give us a hint that plenty of action/volume occurred and those two bars at the very bottom.

So far I can say that I like the Reaction box. Let’s continue monitoring it to see how it evolves.

Good luck with your reactions.

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