How to Think Like a Trading Pro

I spent almost 20 years at the trading exchanges in Chicago and another 20 years writing newsletters, building trading systems and educating traders. As a broker I serviced numerous professional traders. Some used only fundamental data, economic reports or order flow to make decisions. Some used charts and technical indicators, while others entered trades because an automated system or “black box” gave the signal to buy or sell. Some traders incorporated many disciplines into their decision making. But they all were seeking answers to the right questions.

Reading Order Flow

One of the most valuable services I provided was to relay information from the trading pit. Off-the-floor traders frequently called to get to an idea of whether bulls or bears were dominant. They wanted to know who was buying or selling and how much. If I reported that the largest firms were favoring the short side, it might entice a trader to exit a long position before it became too costly. If the large orders were mostly bids (bulls), then price would rise, and that information might allow a trader to hang onto a long position longer and realize bigger profits. This type of information is not available anymore because most trades are executed electronically. However, the lessons I learned from dealing with professionals and reading order flow still resonate.

Ask the Right Questions

I was publishing daily updates for treasury and equity futures for many years. I left the exchange because with the popularity of electronic trading the need for a floor broker essentially vanished. I had always employed a logical format to analyze markets and soon found the approach worked well with all commodities, stocks and ETFs, even off the trading floor. This format was developed over years of answering the questions the institutional traders asked. If you address the following questions before each trade, you will begin to think like a pro:

  • Is there event risk? Economic reports, earnings, Fed speakers
  • Who controls momentum? Interpret near-term direction
  • Is the timing right for a trend to begin?
  • When will it move and how far will it go? Price projection
  • Where will value develop? After a trend where will a flag or pennant form
  • Where are support and resistance levels? Buy and sell areas
  • Will the range be above or below average? Track average true ranges
  • What is the risk? Where does momentum reverse
  • Is the market too rich or too cheap? Overbought/oversold

Each morning before sending trade recommendations I try to answer the questions above for the most widely traded sectors. Those markets are bonds and notes, equity indexes, precious metals, energies, foreign exchange (currencies) and grains, and on occasion I check the softs (coffee, sugar, cocoa, etc.). If you make it a point to view the financial sectors you will notice the correlations between these markets. When one moves, it often has an impact on another. For example, recently a jump in interest rates has had a negative impact on stocks and a positive one on the dollar. And a positive move in the dollar has a negative impact on gold.

Final Thoughts

Apply a consistent format to analyzing markets. Use the questions above as your guide to steer your research to use logic and market-generated information to take positions in any market.  

John Seguin, Market Taker Mentoring

Trader Education