April 16, 2014

Quiet trading days can be profitable days. – $NQ

CandleChart_line_graphQuiet trading days can be profitable trading days.  Pre-holiday markets look to have kicked in on Wednesday with the beginning of Passover this week and the long “Easter” weekend coming up.  There were long periods of no direction with choppy trade being the pattern.

 I don’t think anybody really likes choppy range bound trade.  In fact I think it frustrates many as they sit and have stops triggered in both directions.  One trader who called me on Wednesday decided to blame himself by saying, “no matter which direction I choose it comes back to bite me in the ass.” I can’t blame them for the feeling, but the problem may not be that the trader is wrong about direction or how to trade.  Maybe it has more to do with “market awareness” and knowing how to ‘tweak’ your strategy to fit what the market is giving.  This is a very important process to learn and master. 

Let’s take a look at the $NQ and Wednesday’s trade.  What was apparent before the opening, how did the markets leave trading on Tuesday’s close?  What are my expectations with regards to market direction, intensity of the move(s), which strategies will I use, which risk management profile will I employ?  What indicators will I look towards for signals?  How will I ‘tweak’ my strategies to fit a changing market mood? This is part of my daily process that I do pre-market.  Please don’t be naïve in believing you can just switch on your screen and jump in without any preparation. 

A major premise every day trader needs to embrace and accept is not caring why the markets are going higher or lower.  Not caring that sometimes, as in Tuesday’s turn off the low back to the highs, the markets make sudden thrusts in the opposite direction for no apparent reason other than more buyers than sellers or vice versa.  Don’t misunderstand, I didn’t say not know why.  There is a big difference between not knowing and not caring.  It is easier to trade knowing at what rate the index arbitrage traders are flooding in to the markets with buy and sell orders.  I don’t have to care why they are choosing to buy and sell when they do and by not caring you can trade the number. 

Reduce the equation down to its most common denominator.  That is always going to be a number.  Whether that is pertaining to your profit target, stop loss level, number of contracts to trade, or indicator.  Now you can start to effectively build your market awareness.

blinkofaneyeAt any given time there are many factors in operation – many signals being generated that produce volume and direction.  It may be momentary or it may be for several days.  As I’ve talked about previously, each and every trading day there are day traders, position traders, and arbitrage traders within the equity, treasury, precious metals, and commodity markets most running algorithms trading in a microsecond, that is dividing a millisecond by the way.  A blink of an eye takes 300 to 400 milliseconds. There are 1000 milliseconds in each second so a blink of an eye occurs in approximately one third of a second.  The modern human brain hasn’t developed enough to consciously process stimuli in microseconds.  That doesn’t mean our brains are not capable just not developed enough.  However, having said that there are trading firms spending way more money then I’ll ever see in my lifetime to be ahead of the pack by microseconds.  This is why I also always say, “I just want to be a gnat on the elephants ass.  Let the hunter shoot the poor elephant.” 

option-greeks1-150x150There are derivatives on just about every listed product under the sun.  Options on equities, futures, and commodities have expanded daily volumes as the additional traders hedge and balance positions – how you may ask?  By adjusting what is commonly known as the Greeks, which are:  first order – delta, vega, theta, rho and lambda, and second order – gamma, vanna, vomma, charm, veta, and vera.  Yes, there a several I’ve never heard of and I’m an ex-market maker.  In any case the greeks are the quantities (numbers) that measure the sensitivity of price of derivatives to a change in the underlying parameters which the value of an instrument or portfolio’s risk sensitivities, risk measures, or hedge parameters are dependent on.   

Learning to trade the “number” is an astounding concept that human beings have a lot of trouble with.  Talk to a statistician about this.  Understanding the odds and probabilities is important.  Not understanding them may ultimately defeat you and force you out of the game.  Understanding how various types of traders can affect an underlying.  Understanding that computers don’t have emotions, they operate mechanically at break neck speed.  Understanding the laws of probability. 

Check tomorrow’s post as I continue the discussion on market awareness and “trading the number.”  Today’s chart is again the $NQ but through the eye of the Falcon and under the microscope.  This is where I basically dissect the first couple of hours, check it out for trades and discussion.  

4-16-2014 3-41-05 PM_NQ_FALCON