I spent almost 20 years at the trading exchanges in Chicago and another 20 years writing newsletters, building trading systems and educating traders. As a broker I served numerous professional traders. Some used only fundamental data, economic reports or order flow to make decisions. Others used charts and technical indicators, while some entered trades because an automated system or “black box” gave the signal to buy or sell. Some traders incorporated many disciplines into their decision making. But they all were seeking answers to the right questions.
Reading Order Flow
One of the most valuable services I provided was to relay information from the trading pit. Off-the-floor-traders frequently called to get to an idea of whether bulls or bears were dominant. They wanted to know who was buying or selling and how much. If I reported that the largest firms were favoring the short side, it might entice a trader to exit a long position before it became too costly. If the large orders were mostly bids (bulls), then price would rise, and that information might allow a trader to hang onto a long position and realize more profit. This type of information is not available anymore because most trades are executed electronically. However, the lessons I learned from dealing with professionals and reading order flow still resonate.
Think like a Pro
I have been publishing daily updates for treasury and equity futures for many years. When I left the exchange, due to the popularity of electronic trading the need for a floor broker had essentially vanished. I had always employed a logical format to analyze markets and soon found that the approach worked well with all commodities, stocks and ETFs, even while off the trading floor. This format was developed over years of answering the questions the institutional and professional traders asked. If you address these following questions before each trade, you will begin to think like a pro.
- Is there event risk? Economic reports, earnings, Fed speakers, etc.
- Who controls momentum? Interpret near-term direction.
- Is the timing right for a trend to begin? Markets move from balance to imbalance and the process repeats.
- After a market enters a trend, how far will it move? Price projection with average ranges.
- Where will value develop? After a trend, at what price will bulls and bears transact most often?
- Where are support and resistance levels? Price where a trend reverses direction or enters a congestion phase.
- Will the range be above or below average? Track average true ranges by day, week, month, etc.
- What is the risk? Where does momentum reverse?
- Is the market too rich or too cheap? Overbought/oversold.
Each morning before sending trade recommendations I try to answer the questions above for the most widely traded sectors. Those markets are bonds and notes, equity indexes, precious metals, energies, foreign exchange (currencies) and grains, and on occasion I check the softs (coffee, sugar, cocoa, etc.). If you make it a point to view the financial sectors you will notice the correlations between these markets. When one moves, it often has an impact on another. For example, a rise in interest rates may have a negative impact on stocks and a positive one on the U.S. dollar. And a positive move in the dollar may have a negative impact on gold.
Final Thoughts
Apply a consistent format to analyze markets. Use the questions above as your guide to steer your research to use logic and market generated information to take positions in any market.
John Seguin
Senior Technical Analyst
Market Taker Mentoring
