Think Like a Pro Trader

Posted on Thursday, March 7, 2019 at 4:34 PM

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 Mentor Mentoring, Inc.

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