Spend time with a broker or pit trader from the era when all trades were executed at an exchange and you will learn a lot about the auction process and the information it provides. Trading pits are spheres of activity that appear chaotic to the untrained eye. But for a seasoned observer. a trading pit reveals vital information. Every trader or broker monitors order flow. After assessing any number of variables from the market generated information, they decide to buy, sell or not trade at all.
For about 20 years I watched price action in many of Chicago’s futures pits. One of my duties was to report the information to institutional traders, fund managers and retail clients. I frequently felt like a color commentator at a sporting event. For example, a trader from New York would call and ask who or what firm was buying or selling. Meanwhile another trader from London might ask how much was on the bid or how much was offered. Another client might inquire if volume was light or heavy or where should they look to buy, sell or set risk. The questions varied but there was some consistency to the information all traders seek.
VERTEX to Become A Successful Trader
To create a discipline or strategy, it is wise to follow the same path professional traders take. The goal…Find the answers to the questions pros ask, day in and day out. In this trader checklist guide, I condensed these questions into an easy to remember acronym, V.E.R.T.E.X.
To become a successful trader, it is imperative that you learn to address and analyze the components that make up VERTEX.
The “V” stands for Value. Value is that price where buyers and sellers trade most often over a given time frame. It is considered the high volume or fair price. Momentum is defined as the movement away from a fair price. Which brings us the next letter.
“E” is for Energy or momentum. To catch a trend higher, it is important to recognize when bulls have taken control of momentum. And sellers will show dominance in a declining trend by hitting bids. There are many technical indicators that are used to determine momentum, most notably moving averages. I prefer to track fair prices to determine when momentum becomes apparent.
The “R” represents Risk in this trader checklist guide. Risk can be defined as a change in momentum. Many traders asked about where they should enter a stop loss order. If a trader has entered a bullish position, it is important to enter a stop loss at a level where momentum turns negative and vice versa.
“T” stands for Timing. Markets do 2 things, they trend and consolidate or run and rest. When a market is considered overbought or oversold it has moved too far too fast, thus favoring a rest period or consolidation phase. Therefore, the timing is not right to enter a trend type trade. On the other hand, when ranges and volume are below average during a period of consolidation, odds increase for a breakout or trend to begin. A trader should track ranges in various time frames (day, week, month). When these measurements are far below average, the timing is often right for a trend to commence.
The second “E and “X” are for Entry and Exit. They are also known as support levels which are below the current price. And resistance levels are above the current price. They can also be thought of as projections or prices where profits might be taken. Old high-volume prices and low volume pockets tend to provide support/resistance when retested.
When creating strategy, a trader must address these variables. If you want to trade like a pro you will have to learn to think like one.
Senior Futures Instructor
Market Taker Mentoring Inc.