What you can learn from 15 minutes of trading
When I first
joined a professional trading firm as an in-house psychologist,
one phrase I heard repeatedly was “take what the market gives you.” Most of the
traders at the firm were quite active in the market and could get chopped up in
slow, narrow markets. The most frequent performance problem cited by the
traders was “overtrading”. Overtrading refers to putting trades on without
having an edge in the market. Overtrading is the opposite of taking what the
market gives you.
Monday’s market was a perfect overtrading
environment. The day’s range was 6.25 points on the ES futures, among the
slowest days in the past several months. Traders anticipating breakout moves or
trying to ride momentum are especially vulnerable in such a market.
But how do you know what the market will give
you?
Fortunately, there’s a guide that has proven
helpful both in my trading and in my work with traders. We know that volume
correlates quite highly with volatility. We also know that volatility displays
what statisticians call serial correlation: the volume of the next time period
is significantly correlated with the volatility of the current period. If we
can look at the volume of the market during the market’s opening period, we
might gain a window on volatility for the rest of the day.
For instance, I looked at the ES since the
beginning of August (N = 74 trading days) and found that the average volume for
the opening 15 minute period is a little over 48,000 contracts. Monday’s
opening volume, however, was only 33,000 contracts–over a standard deviation
below the mean. To put this into perspective, only 13 of the 74 days during
this period had a lower opening volume.
During this period, the ten days with the lowest
opening volume averaged 10 ES points for their daily range. The ten days with
the highest opening volume averaged 15.5 points for their range. Six of the ten
days with low opening volume had daily ranges of under 10 points; only one of
the ten days with high opening volume had a range of under 10 points. Only two
of the ten days with the lowest opening volume had a range of 12 points or more;
eight of the ten days with the highest opening volume had such a range.
Knowing a market’s volume relative to recent
norms provides a meaningful clue as to volatility, and that is a meaningful clue
as to opportunity. A slow opening period may not tell you how to trade, but it
can be very helpful in telling you to not overtrade.
Brett Steenbarger
Brett N. Steenbarger, Ph.D. is Associate
Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of
The Psychology of Trading (Wiley, 2003). As Director of Trader
Development for Kingstree Trading, LLC in Chicago, he has mentored numerous
professional traders and coordinated a training program for traders. An active
trader of the stock indexes, Brett utilizes statistically-based pattern
recognition for intraday trading. Brett does not offer commercial services to
traders, but maintains an archive of articles and a trading blog at
www.brettsteenbarger.com. He is
currently writing a book on the topics of trader development and the enhancement
of trader performance.
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