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How much should you change your trading strategy based on the Futures Pre-Market activity?

An example of this would be when there is a big jump in the index before regular trading hours.

  • What is causing traders to take action the moment a day session opens?

  • Is the available Pre Market data going to give us a good idea about how the regular market hours will go?

Thank you for your feedback.

Mo

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We can get into an extensive discussion over this. Still, I’ll say this, there’s no secret formula to pre-market, and in my opinion, it’s not an indicator of how the day session will behave in terms of direction.

It’s always a case-by-case basis, different for each session and situation. Someone could make a case for days as we had in March/April 2020 (Covid Vol), where sessions during the day were extensions of overnight, but again, we need to make a case for overall and not selective events.

You could watch the first 15 minutes past the cash open(9.30 EDT) if the overnight trend in terms of % were significant. And let the buyers/sellers abord news, develop direction, etc.
I hope this helps. I hope others will weigh in.

Matt Z
Optimus Futures

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@138Way I started writing this a few days ago but between trading live, testing new strategies in sim, and other errands it has been a very busy week. Hope this helps:

I’ll give some background before answering the question: There’s many participants with various time horizons who are involved in the market for different reasons (speculating, hedging, spreading, market making, etc.). The 5 main time frame groups are scalpers, day traders, short term (2-10 days), intermediate term, and long term. Who chooses to participate right on the open will vary, but there are typically structural and behavioral clues of the sorts of market participants involved throughout the session (things like excess, range extension, degree of directional conviction, order flow phenomena, etc.). Markets can be said to either be balanced or imbalanced. When they’re balanced (range bound) the market is doing a good job of facilitating two-way trade and the prices are seen as being fair enough for both buyers and sellers to be involved. Generally speaking, the shorter term participants are seen to be most active in this sort of a market and they’ll tend to rotate around prices trading back and forth. In this scenario, it is more likely that the longer term participants are more active at the edges of the day’s range, if at all, buying below value and selling above value with the short term participants essentially acting as middle-men facilitating the trade. Short term participants provide liquidity, while long term participants have much greater directional influence. When the market becomes imbalanced both sides are essentially agreeing the the current prices are no longer fair and so it has to move directionally (trending) to entice the opposite activity where two-sided activity can occur again. 3/22/2021 was a good example of an imbalanced market, it had to keep grinding higher to shut off buying and bring in enough selling activity to overwhelm the demand of the buyers. The sell off in the later part of the day could’ve been due to long participants liquidating before the close, buyers no longer being interested in buying at those prices, sellers becoming more aggressive and responding to prices that they think are far enough above value to be good shorts, etc. The market can also become imbalanced for shorter periods of time, last week’s reaction to non-farm payroll was an example of the market very rapidly pricing in the information. Markets spend most of their time in channels or trading ranges which are more two-sided than strong breakouts, which will typically only take up about 5-10% of the bars on a chart.

Now, to work towards an answer to the question, when the market opens out of balance (out of the prior session’s range and outside of prior value), it forces participants to act. The further away it is from prior session’s activity the more time-frame participants it will tend to bring in. This is why markets that open outside balance can lead to big days since so many participants are repositioning. When the market gaps up or down, it can either continue to find activity in that direction or those prices can be rejected and the market can go in the opposite direction. This is why it’s so important to always be monitoring for continuation since it can be easy to get caught on the wrong side of a big day. Price is always auctioning up and down advertising opportunities and participants choose to structure trades based on this activity and their trading objectives.

It can provide some insights, but like I said above the most important thing is to keep watching what’s currently happening in relation to the overall context. For example, when the market gaps down, any sell side activity that is taking place is termed to be “initiative activity” since those sellers are taking initiative and selling even below prices that were previously seen to be fair. This is more aggressive. Likewise, any buy side activity is termed to be “responsive activity” since those buyers are responding to the lower prices. This is more passive. Say I’m monitoring for continuation to the downside, I’d be looking to see the quality of the price action to the down side: Are there consecutive bear trend bars? Are they aggressively selling the lows or are there pullbacks? Are there prominent tails or is there considerable overlap between bars? What is the relationship between buying and selling pressure? Those sorts of questions are asked. These considerations are made within the instrument itself and are very important for generating trade ideas, deciding whether to trade in the direction of the gap or in the opposite direction, the sort of entry to use, targets, and so on. There isn’t a clear cut answer for how to modify strategies since it is something that is generally decided on a case-by-case basis due to the number of variables involved. These are the sorts of things that I take into account for my decision making though. Get in the habit of asking yourself questions throughout the trading day, that’s a large part of how the skill of discretionary trading is built. One thing that relates to the premarket itself that I do take into account is the overnight high and low since the market typically trades beyond at least one of the two.
Something else that can be somewhat useful, but less so, in my opinion, than the market generated information from the instrument itself, is looking at correlated and inversely correlated markets on a quote board. A simple example: if the market has gapped down and all the major indices are down, are the safety assets like 10 year, 30 year, bund, gold, Yen rising or falling? We’d generally expect indices and safety assets to move opposite to each other. That can provide some insight into the potential flow of capital from certain assets to others. Sometimes the market will be fairly clearly risk on or risk off, but many times it will be pretty mixed. This provides a more macroscopic level of context based on the broader market. I consider the quote board to be a very bird’s eye view of the market as a whole and the majority of my attention is placed on the instrument I’m trading itself.

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Thank you, @Trader the name on the board fits your knowledge! There are many things to consider here, but what I gather is this:

  1. Check if the open continues its trend from overnight, make a decision accordingly
  2. Pay attention to the gap from the last session close, and decide if that may continue
  3. Watch other assets like ZB Futures and GC Futures and see if there any flow to those assets directly
  4. Check account high and low for the overnight (Trade around these levels or use for support and resistance)?
  5. Keep asking questions whether the buyers or sellers in control

I can appreciate your busy schedule, and if you don’t mind, I’ll keep creating new questions. As an FYI, I have read all your answers on this thread, and they have helped me understand trading as a multidimensional business. While I believe I am on the right track, I don’t want to have the proper core for future analysis. Your words are not wasted; you are a Legend!

Have a great weekend

Mo

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Thank you for your kind words, Mo, I appreciate it! I’ve learned mostly in solitude (and the learning and improving always continues!) and don’t have anyone around me to talk to about this stuff so I enjoy having the opportunity to do so here. Matt and Jake have set up a great forum!

  1. Yes, keep monitoring for change and continuation. There’s a concept known as “overnight inventory” which is essentially the long and short positioning since the prior session’s settle. Sometimes that can lead to an “inventory correction” which is basically movement that is opposite to the overnight positioning. For example, in a bear market the overnight session may continue to sell off, but the open may initially rally due to short covering before the downtrend continues. The bigger picture context needs to be taken into account since there’s many variations of how things can play out.
  2. The context is key again. I’ll give an example: Yesterday (3/26/2021) having higher time frame awareness made me much more biased towards the buy side. I always look at the monthly, weekly, and daily charts prior to the session. All three were looking more bullish than bearish. The daily chart formed a strong buy signal bar on Thursday and was also a second entry long (“high 2” buy) on that time frame. Friday’s session open gapped up from Thursday’s close (referred to as a “micro gap”). These were all bullish signs. The RTH open was weak though with a tight trading range (technically it was a small triangle - three pushes up and down - before breaking out for two legs to the upside) and not much directional conviction so it’s likely that day time frame participants were predominantly active early in the session. Most of the session was two-sided (neutral day on the Profile, also seen as a large expanding triangle on the chart) before a higher time frame buyer aggressively stepped in after the sell climax around 3 PM (I don’t have a chart in front of me at the moment so the time might be a bit off). Based on the fact that the market was never able to trade below 3900 it was possible that a large participant was buying near the lows throughout the session (particularly because there was an extreme amount of absorption right around 3900 at the close on Thursday), but the day time frame participant was likely most active throughout the majority of the session. The very aggressive ~60 point rally is almost certainly due to a large other time frame buyer stepping into the market since the day time frame participants will not show that level of directional conviction. Earlier in the day it was best to buy low, but seeing the strength of the rally even buying higher was reasonable later in the day. The market was transitioning from balance (two-sided) to imbalance (one-sided) and those circumstances need to be traded differently. So there’s almost always many pieces of information that go into making decisions on trade location and direction, type of entry, targets, etc. and we’re always thinking in probabilities.
  3. In my case I only use correlated and inversely correlated markets to a very small extent. I pretty much only look at other instruments on the quote board paying attention to daily change, percent change, last price relative to OHLC if I want a little more detail, that sort of thing and mostly before the session (it’s the next thing I do after looking at the monthly, weekly, and daily charts).
  4. There’s a stat known amongst traders that on 96% of days the market will break either the overnight high or low. The exact percentage may fluctuate based on the data that’s sampled, but the general idea is that on most days one or the other will be broken. Strategies can be shaped around knowing ideas like that.
  5. Yes, always be watching for shifts in control. There is almost always a bullish and bearish argument to be made so consider the market from both sides. Up doesn’t always mean up and down doesn’t always mean down. For instance, the large bear trend bar yesterday before the aggressive bull reversal had a higher probability of success to buy below it than sell below it given the overall context (double bottom, staying above 3900, consecutive sell climaxes, possible sell vacuum test of the low, bottom of expanding triangle and neutral day, prior bull leg up that was strong enough for several consecutive bars after a reversal bar so likely at least a small second leg sideways or up, bullish on higher time frame charts).
    It takes a very long time to assimilate enough of an understanding to be able to apply it in real time, particularly if you’re building the discretionary skills required to be able to trade in any market environment. There are still aspects of my trading that I’m working on improving too to get to the level of trader that I want to be. Trading is very hard to learn so be patient with yourself throughout the process and spend a lot of time in SIM before trading live. I’m throwing a lot of concepts at you, but just focus on gradually building up your understanding and experience, there’s no other way to do it. I’ll probably take a break from posting for awhile because it always winds up taking up much more time than I intend in order to be as comprehensive as I like to be but I’ll be around as time allows. Keep learning, improving, and asking questions (side note: consider reading the book The 5 Elements of Effective Thinking - it’s not a trading book but it provides a valuable framework for learning), there’s a lot that has been posted by a number of different members here that’s worth digging into!

Thanks, I hope you have a great weekend too!

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I am with you on that (solitude), and I remember Matt once said that trading should be a lonely sport. He was right! The less I share with people that I trade futures, the fewer “tips” I get, and the less cluster and influence I have on the way I think. I am very tactical towards goals, but as anyone who is building his trading skills, I am still influenced and doubt my theories. In that sense, I am very grateful to interact with you and others who do trade and face these challenges daily (my way of saying thank you to Matt and Jake for building this forum).

I have read your posts several times because they are excellent advice, and ideas typically get through when I read them five times. But, I try to test things with real funds, and I know that some may not work out. The Micros give me enough of a feel for the strategy. When I paper trade, I get nowhere. I am making way too much money and get filled way too many times. Then I go live and need to adjust it so often that the model in paper trading is just a futile exercise.

Thank you for the book recommendation. I ordered it.

If you don’t mind, I will start new threads because I am curious how you would approach it.
Your way of thinking is unique to most traders. Thank you again for all this priceless trading material.

Mo

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@Trader Thank you very much for helping new traders and recommending the book that helped you.
Not everything in trading comes from trading, and other sources could help, especially those related to decision making. Motivational books, psychology, strategy, and other topics could get you focused and oriented in the marketplace.

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Agreed! There’s so much to be learned about trading from sources outside of trading. Not too long ago I heard a professional surfer saying “I’m just doing what the waves tell me to do.” A lot of what’s learned from competing in sports and from watching high level athletes prepare and perform is applicable to the markets. I was skimming through a book called Zen Golf by Dr. Joseph Parent recently and that had lots of ideas that are applicable to trading too.

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It can feel that way but you’d be amazed by how much progress can be made by just trying things, questioning and thinking critically about what you’re doing, and gradually refining. I’m glad to hear that you ordered that book, the chapter on making mistakes and learning from them is very applicable to learning to trade. In SIM intentionally overtrading is worthwhile so that principles are learned through direct experience. Learn and observe, experiment, refine, repeat. Focus on understanding market behavior, how it tends to repeat, and plan for how you can make use of that. There will be changes between SIM and live trading (for instance, taking fewer trades focusing on the better opportunities, more emphasis on mental management, etc.), but it’s cheaper to learn as much as possible from SIM. Paper trading also provides a good opportunity to test different tools/methods and see how they affect performance. That being said, if you are making progress from trading a small amount live right from the get-go, then keep going for it. I’m describing the way that I’ve gone about doing things but it’s certainly not the only way to do it.

And thank you for reading, I’m happy to hear that it’s helpful!

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Your posts add a new perspective to trading all the time.
I bookmark and attached subjects to them, and if I read them in three to six months intervals, I believe it would add a different perspective. Let’s start a thread about paper trading because I am about to get a new post going that could be lengthy. I am struggling building models on demos, but maybe I am approaching it wrong.

Mo

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