I have a backlog of emails and comments from the recent poll concerning integrating system and discretionary trading. Many thanks to readers for their interest. I'll look for further comments today and then will summarize them--and my reactions--in a post tomorrow.
As a gesture of appreciation, allow me to share a piece of my research in this and the next post. In the past, I have only shared this with specific prop traders I have worked with in a coaching vein. The idea of the research is to identify two (related) things that every short-term trader should know:
1) When are institutional participants active in the market? 2) When are we likely to have large price moves during morning trade?Let's start with the basics. As a gross distinction, imagine that we have two kinds of traders in the marketplace. The first are
market makers (locals) who provide liquidity. They are in the markets throughout the day, and they are in the markets every day. Having worked with prop traders who function as liquidity providers in the electronic futures markets, I can tell you that their participation in the market is relatively consistent from day to day. For simplicity's sake, I treat their involvement (volume) in the market as a constant.
The second group of traders are
directional traders who enter the market when they perceive that we are trading away from what they deem as value. They may fade highs and lows, identifying value as somewhere between, or they may trade breakouts, placing value away from recent trading ranges. They generally enter the market on longer-term bases than the locals (scalpers). While directional traders include small individual traders, their volume is dominated by CTAs, hedge funds, mutual funds, and other large, institutional traders.
If we make the assumption that the participation of locals is relatively constant from day to day, then we can attribute surges or plunges in volume relative to average to the increased or decreased participation of large, institutional traders.
When markets are trading with below average volume, they are dominated by liquidity providers. Because those traders generally work orders above and below the current market price, they are selling offers and buying bids. That tends to make them short when markets rise and long when markets fall. They profit, on average, when moves do not follow through and trend. This is why local-dominated markets (i.e., low volume markets) tend to trade in narrow, choppy ranges. There just aren't enough large, directional traders participating to move the market far from current levels of value.
Conversely,
when volume is significantly above average, we have active participation of the large institutional traders. They are perceiving that value is away from where the market is currently trading, and they exert a directional pressure on the market as they lift offers or hit bids. When markets get very active, you'll often notice that the average quantity of ES contracts at each level in the order book (your depth of market display) often drops. This is because locals are pulling in their horns. They don't want to get run over by the large institutions, and they--on average--lack the firepower to hold the market to ranges where they would benefit from selling offers and buying bids. With locals pulling back, directionally biased institutions create short-term trends.
This, then, is why
volume is so closely correlated with volatility. The presence of large institutional traders is what makes for trends. Knowing how volume compares to average tells you a great deal about *who* is in the market and *how* the market is likely to move. When volume is very low, there is little market movement. At those times, there may not be enough opportunity to justify the slippage and commissions of trading. In short, volume = volatility = opportunity. Knowing volume is knowing how much markets are likely to move, because you're tracking who is in the market.
Now for the details. You may want to print this out and keep it by your side when trading. That's what I do.
Going back to the past 105 trading sessions, the median morning trading volume (8:30 AM CT - 11:00 AM CT) in the ES contract is 442,369 contracts. The median trading range (high - low range) for morning trade is .47%. That is a little less than 7 ES points.
The correlation between morning volume and size of the morning trading range has been .73. That's quite high. If we divide our sample into quartiles based upon volume, the highest volume group of days (with a median 569,000 contracts) average a trading range of .71% (about 10 ES points). The next highest volume group of days (median of 485,000 contracts) averages a trading range of .51% (about 7 ES points). The third, next-to-lowest volume group (median of 407,000 contracts) averages a trading range of .38% (about 5.5 ES points). The lowest volume group (median of 280,000 contracts) averages a trading range of .35% (about 5 ES points). In other words, you get twice as much movement (range) in morning trading when you compare the highest volume days to the lowest volume ones.
Think: Can you see how this information helps you set profit targets for morning trading? Can you see why, yesterday, I took profits once the morning market had moved about 6 points from low to high?
Tracking volume *is* tracking the stock market's largest traders. When you see volume expand significantly and when you see that the volume is asymetrically distributed at the bid or offer, you know that large market participants with a directional bias are taking over the show. That is why, yesterday, I alerted readers to a pending breakout move. I'm not clairvoyant; far from it. But I could see that large traders were leaning one way and locals would not be able to fade that in the short run.
When there is low volume, there is relative consensus about market value; when there is high volume, there is uncertainty. Uncertainty is what moves markets and facilitates future trade. As we will see in my next post, the current period's volume and volatility is positively correlated with those in the next period. Knowing participation *now* informs us about the near-term future.
Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com.
From left, with Forex/Elliot Wave Expert Don Schellenberg, NextVIEW's Paul Yeo and Stephen Lai, "CNBC Chart Man" Daryl Guppy at Bursa Malaysia 2005
From left, Forex experts Dar Wong and Don Schellenberg at Singapore Asia Trader and Investor Convention, ATIC 2009
From top left, with Trading coach Stuart McPhee and Professional licensed futures trader Brent Penfold at Singapore Asia Trader and Investor Convention, ATIC 2007.
With Trading Coach and Author of best-selling trading book, Trading for a Living, Dr. Alexander in 2008.
Interviewed in a business TV Channel in Pakistan while conducting a course and invited to speak at the Karachi Stock Exchange.
Principle #1: Trading is a performance activity
The general rule in trading and technical analysis is to keep it simple. The more complicated a chart, the greater the room for error and excuses for not taking appropriate action. The usual chart display for COMEX Gold shows exceptional volatility and a web of four trend lines.
Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.
On Tuesday morning, markets in the Asian region were down. However, it rebounded after investors went into bargain hunting and selling pressure started to ease. Only the Malaysian market was down with 26.67 points at 832.44 after hitting an intraday low of 801.27 points. Hong Kong Hang Seng index which was very volatile in the past few days went up 14% at 12,596.29 points
It was a day of havoc in financial markets all around the world as investors see no hope in economic recovery. Investors especially in Asia region are expecting the financial crisis like the one happened in the US to happen in this region as well. Last Friday markets in the Asian region fell amid a rebound in the US.
percent, or 116 points, to 1,723. Only South Korea managed to buck the down trend as it ended 0.8 percent higher at 946.45. The South Korean central bank reduced its key interest rate Monday by 0.75 percent, its biggest cut ever to prevent the economy falling into recession. Australia's All Ordinaries suffered lightly with a slight decline. The index fell about 60 points or 1.6% to close at 3,768.30. Markets in Malaysia and Singapore are closed for Hindu's Deepavali celebration.
Article contributed by Private Trader, Market Expert, Trading Coach and Chief Market Strategist of Nextview, Mr. Benny Lee. For more articles and commentaries from Benny, click HERE.
The China market has already developed patterns of behaviour which are often related to a change in the direction of the trend. The first behaviour feature is the support band between 1750 and 2000. The second behaviour feature is the long term fan pattern development. The third important behaviour feature is the resistance band between 2600 and 3000.
Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.
Although I’ve been expecting gold to move higher, the mass of participants in the gold market have decided collectively to move sideways for the time being, and perhaps downwards for another test of the low at 736.
Article and Commentary by Don Schellenberg. Mr Don Schellenberg is Senior Market Strategist of the NextView Group. A trader and trading coach, he is a noted expert on Market Structure, Elliott Wave and Fibonacci. He trades the forex market.
lowest since June of 2007. the low also coincided with two or more important Fibonacci ratios, which considering the jitteriness in the financial markets, was enough to trigger an explosive up move. That up move puttered out rather quickly over the next few days and the low at 1.3255 is being threatened again.
The second group of traders are directional traders who enter the market when they perceive that we are trading away from what they deem as value. They may fade highs and lows, identifying value as somewhere between, or they may trade breakouts, placing value away from recent trading ranges. They generally enter the market on longer-term bases than the locals (scalpers). While directional traders include small individual traders, their volume is dominated by CTAs, hedge funds, mutual funds, and other large, institutional traders.
This, then, is why volume is so closely correlated with volatility. The presence of large institutional traders is what makes for trends. Knowing how volume compares to average tells you a great deal about *who* is in the market and *how* the market is likely to move. When volume is very low, there is little market movement. At those times, there may not be enough opportunity to justify the slippage and commissions of trading. In short, volume = volatility = opportunity. Knowing volume is knowing how much markets are likely to move, because you're tracking who is in the market.
Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com.
The US market started off with a bearish momentum amid rising fears of recession and ended up in a strong bullish note especially in the last hour.
For the second time in one week, the benchmark Nikkei225 index fell the sharpest with 11.4% decline or 1,089.02 points. The Nikkei closes at 8,458.45. The Japan market was in turmoil for the past one week, the Nikkei suspended its trading last Friday.
Investors all around the world are pessimistic about the current economic situation despite optimism shown in governments. Central banks in Europe including the US have aggressively approved hundreds of billions of dollars to bail out ailing finance companies in hoping to ease the deteriorating financial and economical situation around the globe.
analysts, as reported in AP news. This made it clear that the consumers are more careful in their spending. Light, sweet crude oil fell $4.09 to settle at $74.54 per barrel on the New York Mercantile Exchange, a 13 months low. Price of Crude Palm Oil fell RM107 or 5.8% to close at RM1,743 per metric ton, currently at a price level 2 years ago.
Article contributed by Private Trader, Market Expert, Trading Coach and Chief Market Strategist of Nextview, Mr. Benny Lee. For more articles and commentaries from Benny, click HERE.
Markets in Asia today follow-up on yesterday's rebound after a strong rebound on the US Dow Jones Industrial Average. The Japanese market heads the list with a 13.6% increase or 1,122.9 points, the biggest one day increase ever for the Japanese market. The huge jump was because the Japan stock market was closed yesterday when markets rebounded.
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