What Is The Market Trying To Do?

Here is an email from and response to a trainee trader:
Hi Mr Bower,
I am trying to experiment with how to better tackle trending & choppy markets, and some fading strategies. I’m also trying to trade the more volatile ES. Trying to step out of my comfort zone.

Apparently, the usual scalping I do on ZN didn’t work on ES. After trading for the last few weeks, I realize I do reasonably okay in quiet ranging ZN market with scalping trades. The ES being quite a different animal, had me in the red.

Problems that I feel is impeding my progress.
1) For trending market, I have a mental block where I am afraid that the trend will reverse when I try to ride it. Many times I saw the trend was about to reverse but turn out to be a continuation. I find that trending market is giving me some problem now. I watch the ES closely as leading indicator and trade the ZN. Many times I see a sharp move in ES, entered the market but with no movement in ZN. Held the position and end up wrong.

2) For choppy markets, how do I attack it? Market orders with wider stops? But having too wide a stop makes me uncomfortable, especially when it moves against me and wipe out all the small gains I accumulated. Do I avoid trading it altogether? For US equities market, I learnt from Mike Bellafiore in his workshop that many of their traders avoid the first 45 minutes of market open. He termed it ‘Price Discovery’ phase. I am not sure if this is applicable for interest rates futures. How does a seasoned pro anticipate volatility (besides the anticipated data releases) and follow through? Sometimes the market has large sudden moves without any apparent reasons.

I would appreciate greatly if you could nudge me in the correct direction.

Regards,

Guy responds:
In trading you have to keep trying different things. For example when fading you can:

  • Fade when momentum starts to drop.
  • Fade when it looks like the dumbest thing to do.
  • Average into trades rather than trade at one price.

There are all sorts of ways you can approach this – and just remember don’t try to look for something that works all the time. Instead read what the market is doing right now.

We all know each market has its own personality, so you cannot approach two different markets the same way. What some new traders end up learning the hard way is the personality of any one market changes over the course of any one day. It also changes from one day to the next. Those changes are generally subtle, but without question it means the approach to trading that market has to be adaptive.

For me, I like to ask myself “what is the market trying to do?”. Just that question opens up the potential to adapt to current conditions rather than focus on what worked so well yesterday or last week or in some blog post I just read.

You wrote: “For trending markets, I have a mental block where I am afraid that the trend will reverse when I try to ride it. Many times I saw the trend was about to reverse but turn out to be a continuation. I find that trending market is giving me some problem now. I watch the ES closely as leading indicator and trade the ZN. Many times I see a sharp move in ES, entered the market but with no movement in ZN. Held the position and end up wrong.”

Here is a bit of a funny story – a couple of years ago I was walking back to the office on a street I rarely walk down. As I was walking along, I found $60 on the ground. Since then, every time I walk down that street on that side of the road, I remember finding $60 and keep my head down and eyes open.

The logical part of me knows the chances of finding another $60 there is the same as finding $60 anywhere else, but I still associate that little path with finding money. It’s not that I am being hopeful. It’s that I automatically visualize money on the ground at that spot.

Likewise, you are visualizing pain and potential loss when you see a trending market. You just have to visualize what a trending market will give you. Right now you a visualizing an inability to trade a trend or seeing your timing as wrong.

All traders are different. That is, how one trader makes his/her money is different from the next. We apply the same training material to all new traders, but interestingly the traders that move on to be successful are the ones that take that training and create their own approach.

For many scalpers however, I can generalise and say the small movements – a tick here or two ticks there – are bread and butter trades. That’s how bills are paid. It is an approach that is adaptable to almost all market conditions. Those trending situations however can offer wind fall opportunities, or at the very least larger than average profits.

We need to visualize a trending market as an opportunity to grab more than just a tick or two. A decent trend over the course of a day or even an hour can turn an average month into a great one or a negative month into a positive. If we visualise this kind of thing, we will see trends as opportunity we have to be a part of rather than something that makes us hesitate.

You also wrote: “For choppy markets, how do I attack it? Market orders with wider stops? But having too wide a stop makes me uncomfortable, especially when it moves against me and wipe out all the small gains I accumulated. Do I avoid trading it altogether? For US equities market, I learnt from Mike Bellafiore in his workshop that many of their traders avoid the first 45 minutes of market open. He termed it ‘Price Discovery’ phase. I am not sure if this is applicable for interest rates futures. How does a seasoned pro anticipate volatility (besides the anticipated data releases) and follow through? Sometimes the market has large sudden moves without any apparent reasons.”

Pretty much every market I can think of right now has the most activity on open and on close. That excludes days with data and news events of course. This means any particular market will behave differently just after the open and just before the close compared with the middle of the session.

Take a look at this compressed 15 minute chart for Corn. On the volume display you can see spikes in volume at what is the start of the floor trading session and what is the end. Outside of the floor trading session, volume is comparatively low. This applies to many, many markets. This simply shows the markets trade differently at different times of the day.

Now, consider the ‘experienced’ trader, some prefer that open and choppy period. That is their ‘bread and butter’ so to speak. Their strategies and insight work best in these market conditions. They are aggressive traders, fast acting and opportunistic.

Other experienced traders prefer the period where things settle into a rhythm. The might for example trade in a very similar way to our scalping drill. There are many proprietary traders that apply this approach with success. They are calculating, strategic and patient.

As for ‘inexperienced’ traders, that is a different kettle of fish. I have noticed a little trap whereby it seems an inexperienced trader will get it in their head that they cannot trade a certain period.

I once spoke to a trader for example that was convinced he could not trade Mondays. He hated them. About a month later, he was carrying on about how he cannot trade Fridays. I didn’t believe it was a work ethic thing. This is he was not trying to make a 5 day week into a 3 day week.

He honestly saw those periods as too hard to trade. There is that visualizing thing again. He was visualizing the start and end of the week as times as unreadable or unpredictable.

I believe the problem stemmed from him applying his fixed approach to trading rather than being flexible and asking “what is the market trying to do?”.

As a trader becomes more and more experienced, he or she will move toward a specialty. It may be spreads or trading at night or scalping for ticks only or trading only opens and closes.

To get to this level, you need 100s of hours of screen time, possibly 1000s. You need to find things out for yourself by being flexible and open minded. You need to try a stack different approaches and assess them without bias.

Coming back to your specific questions where you asked about placing wide stops and anticipating volatility, the answer is different from one trader to the next – and from one trade to the next. That choppiness could mean any of the following:

  • You trade smaller size;
  • You jump in and out of a trade several times before you get the timing right;
  • You sit on your hands until a view is clear;
  • Your entries and exits are averaged much like our levels or scalping drills.
  • You have a wider stop and are just patient.

These are all possibilities. Remember you have access to a fantastic trading simulator. In the olden days (actually just a couple of years ago) we called this paper trading. It involved coming up with a bunch of ideas and scribbling them down in a notebook. It was not the most effective way of doing things. Today, you have access to XTrader and can try out these ideas at a much faster rate. You can get a better feel for what works and more importantly what works for you.

The key points from this discussion are:

  1. Conscious visualization.
  2. Being open-minded and flexible.
  3. Experimentation.

You’ll notice the answers to your questions were not specific (e.g. “Move your stop from 3pts to 5pts when markets does X”). The answers are more about mindset. It’s all to do with the way you approach learning and ongoing trading.