During my years at the Chicago Board of Trade, I had many friends who were short-term or day traders, also known as “locals,” in the trading pit. The locals provided liquidity to brokers who were filling orders for institutional traders and fund managers. The reward for providing liquidity was that locals were given the edge. Getting an edge meant you sold the offer side or bought the bid side of the market.

Institutional traders typically executed large orders and held positions to ride trends. Locals, on the other hand, traded for one or two ticks many times during the session. They usually traded large quantities for small profits and losses. An institutional trader might do one trade for 1,000 contracts, while a local might do 10 trades for 100 contracts at a time. The point is short-term traders tend to be more comfortable counter trading. Traders are a competitive bunch and often seek to be the first seller at the end of an uptrend or the first buyer at the end of a downtrend. Selling into a very strong market or buying into a very weak market is sometimes called sniping. Sniper trading is waiting in the wings to sell when there is panic buying or waiting to buy when sellers are panicking.

Though I do not condone counter trading trends too often, it can be profitable if the timing is right. Simply selling an overbought market or buying an oversold market is usually not reason enough to execute a countertrade. When attempting to pick highs or lows, it is best to have a combination of signals.

A market is thought to be overbought/oversold if it has moved the length of an average week in a 48-hour period. The combination of a market that has hit resistance and is overbought is a good countertrade opportunity. On the other hand, the best time to countertrade a declining market is when it reaches oversold status and has come into a support area.

Pinpointing support and resistance areas can be a difficult task. One of the more reliable areas where markets reverse is when they retest an old high-volume area. The chart below shows this phenomenon where SPY range exceeded the length of an average week in just two sessions and ran into an old high-volume area. A rather large reversal ensued.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.