As an educator I make it a point to help students build a solid fundamental and technical foundation. Years ago, I started my own “toolbox” that is now filled with facts, axioms and statistics I use to guide me when trading and creating strategies. My first experience in the markets was on the Chicago Board of Trade trading floor. It was loud, hectic and intimidating. There were very competitive and smart people who somehow found order in this chaos. I wanted to learn their secrets. There was opportunity and I was a sponge. I asked questions and kept notes. Here are some of the lessons I learned from professional traders.
My first inquiry to my new boss was, why is the market moving higher/lower? His answer: You better learn the fundamentals or the information that moves the market you plan to trade.
For financial markets such as treasury (interest rates), equity index, precious metal and foreign exchange, I studied which reports had the biggest impact on price. Monthly reports such as employment, inflation, sales, sentiment and housing data are typical catalysts for big price swings. Monitor when those reports are due and what the consensus estimates are. Economic data are priced in before the numbers are released. It is the discrepancy between expectation and actual that moves markets. As a rule, weak economic data make interest rate futures and ETFs rise and equities fall. Gold tends to follow treasuries and energies tend to move with stock indexes. Understanding the relationships between major sectors is imperative to building your foundation.
Chart reading or technical analysis is an important part of every trader’s toolbox. Start with the basics and experiment to find your favorite indicators. I recommend beginning with daily candlesticks. Candles are great for reading momentum or direction. There are seemingly infinite price patterns, but candles a great source for reading if bulls or bears are in command. They can illuminate when a trend is near an end or when one is beginning.
Sometimes interpreting dominant direction is easy. A gauge for judging the speed of a trend is vital for any trader’s toolbox. Explore the following indicators to determine if a market has reached overbought or oversold status. Bollinger bands, Stochastics, RSIs and MACD should be researched to see which fits your style. ATR or average true range can be used to identify whether a market has reached exhaustion, thus increasing the odds for a trend reversal.
Logic is the building block. Ask why and use market generated information to get answers. Your toolbox will grow with your curiosity.
Senior Technical Analyst
Market Taker Mentoring, Inc.