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
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
@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.
Thank you, @Trader the name on the board fits your knowledge! There are many things to consider here, but what I gather is this:
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
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!
Thanks, I hope you have a great weekend too!
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
@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.
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.
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!
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