Spend time with a broker or pit trader from the era when all trades were executed at an exchange and you will learn about the auction process and the information it provides. Pits were created to facilitate trade. To an untrained eye a trading pit looks like a mess of mad, aggressive people wearing crazy-colored uniforms. But for a seasoned observer a trading pit reveals incredible amounts of information that is not available on screens or trading platforms. Professional traders monitor order flow. After assessing many variables from market-generated information (technicals and fundamentals), they decide to buy, sell or not get involved.

One of my duties as a broker was to relay and interpret price action to institutional traders and fund managers. I frequently felt like a commentator at a sporting event. For example, a trader from New York would call and ask who or what firm was buying or selling and how much. Meanwhile, another trader from overseas might ask how big the bid or offer was to find out if buyers or sellers were dominant. Another client might inquire if volume was light or heavy. Some traders sought support levels to buy or resistance prices to sell against. Some just wanted to know where to set risk or stop loss orders. They were searching for an advantage. The questions varied but there was some consistency to the information these professional traders sought.

To create a discipline or strategy, it is wise to follow the similar path professional traders take. The goal is to find the answers to the questions pros ask, day in and day out. I condensed these questions into an easy to remember acronym: VERTEX.

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 to 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. 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 a short position should have a buy stop to determine risk.

“T” stands for Timing. Markets do two 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). This statistic is commonly known as ATR (average true range). When these measurements are far below average, the timing is often right for a trend to commence.

The second “E” stands for Entry. Support levels are prices where long positions are taken, and a bounce or uptrend is anticipated. Resistance levels are areas where sellers are apt to take a stand and prices are expected to reverse lower. These support/resistance areas are often defined using old high-volume areas or very low volume prices.

The “X” in VERTEX refers to eXit. This can be defined as a risk level or a projected profit. When projecting profit potential traders seek to ride a trade or trend until exhaustion. In other words, they seek maximum profit while minimizing risk along the way. This is known as a trailing stop or chasing and locking in profit. Once in a profitable trade the goal is to erase risk as quickly as possible and pocket profits while the trade works in your favor.

If you want to trade like a pro, you will have to learn to think like one.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.

I have mentioned this before and will continue to mention it as much as I can: Please record your trades and review them often. Simply put, there is no better way to see what you are doing wrong and doing right. To me, it has always been an eye-opening experience to go back and review my trades. The reason to do this is to get better. But there is also another reason and that is to learn.

In Group Coaching, I tell traders to take screenshots all the time. I also tell them to take screenshots if they are paper trading. A trader will not learn much if he or she is just focused on the P&L statement, particularly if paper trading. But taking a screenshot like the one below and seeing how the option prices and greeks change over time can really benefit the option trader.

In the example above, a Mar-01/ Apr-2019 call calendar was purchased for 4.75 (5.75 – 1). After the stock moved higher and time had passed, you can see that the option prices and the greeks have changed as seen below.

You can see that same trade now would have to be purchased for 5.89 (6.85 – 0.96). The value has gone up 1.14 (5.89 – 4.75). But why has the value increased? That is what screenshots and reviewing them can do for you. There are so many moving parts with options. This will help you get a better feel about what is really going on…promise!

Taking screenshots, reviewing your trades and learning from how your trades function can help a trader tremendously. All it takes is a little effort, which will pay off handsomely.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

Well over a year ago, I wrote about several of my favorite sayings that of course apply to trading. Well this is a short blog to remind everyone how important this one particular saying is to me and most likely to you. With the volatile market we have encountered over the past several months, there is no better time to remind you of this saying I like to use.

Many of you probably have heard the saying that the first rule in trading is to protect your capital. If you were anything like me when you started trading, you likely thought that the first rule is to increase your capital. Who could blame you as a new trader? But once you realize how trading works, it starts to make sense. Essentially when you think about removing risk first, profits are sure to follow if you are managing things properly. I try to ingrain this notion in my students’ heads, and it needs to come instinctively. You need to properly manage your trades and know when to remove risk, and then trading can become a whole lot easier.

It is always smart no matter what the market conditions currently are but particularly in a market like we have seen. A position is up one day and then down the next. Trust me, you do not want to always take small profits and full-size losses. You will never get ahead. That is why I like to use multiple exits for profits and losses. Remember, you are not just taking a profit or closing out for a loss, you are removing any additional risk too. That is what you really need to understand as a trader. If you do, I promise you will stand a greater chance to consistently extract money from the market for a long time.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

Most days in futures class we review direction indicators for the major sectors of the economy. These sectors often correlate either directly or indirectly. For example, a rise in interest rates may affect currencies, which might have an impact on stocks or precious metals and energy. A small move in one of these sectors is often the first clue of an impending large directional move, which will have an impact on the correlating sectors.

The main sectors and the most liquid futures and ETF symbols…

When stocks began the historical correction down in October, petroleum products turned over and fell into a steep decline as well. Around that same time treasuries, precious metals and yen began to rally. Markets frequently move like dominoes. If one correlating sector begins to move, the others will fall or rise around the same time. So, by watching Japanese yen we may get an early clue on how to trade the dollar, gold or stock indexes before those dominoes begin to fall (react).

We are about to enter the first earnings season of the new year with extreme volatility. When moves both up and down are so fast and furious it is imperative to have a quote board or symbol list that includes the major sectors as in the table above. Some of the best and well-timed trades come from paying attention to a correlating market. I believe interest rates are the economic engine and the other sectors follow. However, on occasion a currency or stock index will be the catalyst for the start of a trend. To recognize subtle changes, I prefer to use 30-minute bar charts and check each sector a few times a day. Pay special attention to the time of day the high and low prices trade. Early identification of a reversal of trend or the acceleration of one will improve your timing for entering and exiting trades. Great timing reduces risk and improves profit potential.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.

This year has been quite volatile, possibly the most volatile ever for stock indexes. The first and fourth quarters saw average day ranges that spanned nearly twice the norm. Day ranges have been closer to the length of a historic average week. When the moves are so extraordinary, risk doubles, as does profit potential. An average of 20-day ranges is adequate to be current with volatility. It is important to be current with range length because it is frequently used to calculate risk and profit targets.

In the daily futures class we search for trades where trend potential is high. We endeavor to enter at prices where the reward is three or four times risk. One of the more effective methods we use involves average day ranges or ATR (average true range).

For example, let’s say we are bullish and have chosen a level to buy the market. After taking a long position the risk (stop loss) is immediately entered at 25% of an average day range below the entry level. The first profit target is at 50% of a day ATR higher. The first objective is not where the trade is exited. When the first target is tested, the stop loss is moved to the entry price. This strategy is designed to reduce risk to zero as soon as the market begins to trend. Assume the profit objective is 100% of a day ATR above the entry price. As the market moves higher, trail the stop at 25% of a day ATR. With this method you can protect profit in case program trading and panic instigate big swings up and down.

Program trading and social media have added to the volatility. These days markets frequently reverse in the blink of an eye. Now more than ever it imperative to define risk immediately after executing a trade. Having a methodology that locks in profit reduces risk and stress as well as helping to avoid the panic trade.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.

Last weekend Argentina hosted the G20 summit, which comprised 20 leaders from around the globe. There were three agenda priorities: the future of work, infrastructure for development and a sustainable food future. Trade and tariffs may not have been listed as priorities, but they certainly were.

When the commodity markets opened Sunday night there were huge gaps in price from Friday’s close to the open. Some markets saw big moves up and others down. Now there was no way to predict the outcome or impact this summit would have. But we did learn a lot about the effects trade between China and the U.S. will have on many commodities. Talk of fair trade sent ripples around the globe. Though we may not have access to research teams, we can get a better understanding of the fundamentals that are driving economies and trade by tracking price action at critical moments.

The most recent critical moment occurred Sunday evening (12/2/2018) when the futures markets opened. What we learned that night…

Stocks here and abroad took the “fair trade” news very well, thus opening sharply higher. The U.S. dollar fell against the currencies of our continental trade partners, the Mexican peso and Canadian dollar. Interest rate futures weakened while precious metals and crude oil prices rose. Natural gas declined while soybeans, corn and wheat opened acutely higher. There was little or no impact on livestock. Cotton was the only soft commodity that rose sharply.

So, if fair trade agreements occur, we have a good idea of the likely direction for many commodity sectors and currencies. If a pact cannot be negotiated, the rolls in price movement should reverse. By late Monday many of the markets that rose on trade talk reversed and moved sharply lower when it was reported the trade agreement may be fictional. Thus, the markets that fell rebounded.

The point is to monitor price action after a major event. Focus on the futures from each of these sectors to get a handle on economic impact and trade relations: equity index, interest rates, precious metal, foreign exchange, energy and grains.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.

In the first of the two SPY charts below, we see a steady rally in 2017 where the average month range spanned about 8 points. Then in January 2018 the range more than doubled the average bringing on an overbought signal. It was the last thrust higher that ended the nearly nonstop yearlong rally. The range during the February reversal was nearly four times the norm. It took four months of sideways choppy trade to ease the oversold signal from February’s steep decline. The reason for the history lesson is to prepare for the next few months.

The second macrograph shows the October decline was just as dramatic as the one earlier this year. Subsequently, we should be prepared for very dramatic moves both up and down while the oversold situation dissipates. This phase of choppy trade may last well into Q1 of 1019.

At this point it is not clear if the indexes have cheapened enough to entice buyers. However, if we look back to February and April, we see that buyers became aggressive when SPY dipped below 260. Normally when markets return to old support areas, buyers emerge. If there is any truth to the phrase “patterns repeat in all markets and all time frames,” then the pattern over the few months will be akin to price action that occurred after the February decline. In that case 255-258 should be a solid support area and 280-283 should provide resistance through December and possibly longer. When either of these areas are tested look for changes in your favorite short-term trend indicator. During volatile times holding out for good trade location above and below the market will reduce risk and enhance profit potential.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.

Growing up in Chicago had plenty of perks: a beautiful skyline and parks, plus great food, entertainment and sports. But for the harsh winters, it is my kinda town. After college I had the opportunity to work at the futures exchanges, Chicago Board of Trade and Chicago Mercantile Exchange.

My first experience on a trading floor was horrifying and exhilarating. In my eyes it was total chaos with people in crazy colored coats running amok, while brokers and traders shouted with flailing arms in different arenas. The spheres of trading activity, also known as pits, were in seemingly constant motion from open to close. After that first day I was hooked, and the next 20 years were filled with many incredible lessons.

Over the years one thing I learned about short-term or day traders is that they are a defiant bunch. When prices fell they endeavored to pick the bottom or lowest price of the move. And when prices rose they looked to sell the high or top of the rally.

Top and bottom picking require incredible timing. But before markets get exhausted either up or down there is a pattern in price action that tends to precede change in direction. When a market moves methodically the trend tends to extend. A methodical move is when the day ranges are near average length during a rally or decline. A 20-day ATR (Average True Range) is my preferred benchmark.

Often before a rally ends there is panic buying, which brings on an overbought signal. Conversely, an oversold signal frequently kicks in prior to the bottom of a trend.

If a day range is twice the norm during a rally, it is considered overbought. Thus, the odds for a reversal increase and top pickers emerge. On the other hand, when a day range spans two times the average during a decline a pace problem appears signaling an oversold situation. When this occurs, bottom fishers often surface.

Overbought and oversold situations are common just before extremes are made. Measuring the speed of a trend is an integral part in a trader’s tool box. There are many technical indicators meant to help traders top pick and bottom fish. Some of the more popular are RSIs, Stochastics and MACD.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.

From the Journal of a Stay-At-Home Trader: Struggles on the Journey 

I’ve been pondering something I wrote a short while ago:

“See, the way I look at it, a weakness in this context is something that can be strengthened through study, practice, perseverance and lots of good, old-fashioned hard work. It is similar to one’s muscles getting stronger through focused weight training.”

It’s funny how the exact same thing can be both a strength and a weakness. I’ve always been very detail-oriented. I love researching things, having 15 tabs open on a single browser window, just waiting for me to absorb all the knowledge that I can devour. My love for details has been a strength for me on my options education journey. It is that love that propelled me, once I got over my initial fears, to delve deeply into the Greeks. I had such a desire to really understand them.

Yet, that love for details was also a hindrance. Since I was trading off the daily timeframe, I was only performing my technical analysis on the daily charts. Focusing on the day-to-day movements meant I wasn’t stepping back to look at the overall trend, nor was I zooming in even more to look for optimal entry points. A common result of this was taking counter-trend trades I didn’t even realize were such.

I found a quiz once that was supposed to help a trader pinpoint weaknesses and areas to improve. No surprise, the results were that I had a lot of things going for me, but I would never become a successful trader until I learned to grasp the big picture. In other words, I needed to learn to examine the forest and not just stare at the bark on the tree trunks.

That is when I turned to technical analysis on multiple timeframes. I organized my charting platform so I could have multiple views of the same underlying, all on the same page. To the left of my daily chart, I set up a weekly chart; to the right, I set up a 15-minute chart. Although I can easily toggle to different timeframes on a single chart, it is very convenient and time-saving to have the different timeframes side by side. I forced myself to look at the weekly chart first: Is there an obvious overall trend? If yes, bullish or bearish? If not, is there “tradable” chop and slop in a well-defined channel that has been respecting horizontal support and resistance? Or is it just the kind of chop and slop with big candles and ugly gaps that should make me tell myself, “Move along; nothing to see here”?

Only after I got a sense of the big picture did I allow myself to turn to the daily charts. If the weekly chart was bullish, I only allowed myself to look for bullish trades at a favorable entry point, like a reversal off a moving average or a horizontal support line. If the daily chart looked extended, then I made myself move on. No more counter-trend trades! If the weekly chart was bearish, same thing: only bearish trades allowed, with an ideal entry being a reversal off a moving average or a horizontal resistance line. Tradable chop and slop on the weekly was a little trickier. I had to be aware of potential breakouts above or breakdowns below the channel’s support and resistance. But at least I knew the possible pitfalls and that I had to monitor these types of trades more closely.

Finally, I turned to the 15-minute charts to see if there were any other “hidden” support and resistance levels — hidden, that is, on the daily but very clear on the 15-minute. Breakouts and breakdowns around these areas sometimes gave me greater confidence to enter a trade — more edge, more putting-the-odds-on-my-side.

My technical analysis will never be perfect. But any weakness I can pinpoint and strengthen is one more tool in my toolbox, to carry along as I traverse the path to the trader I know I can become.

By A.K.