I spent nearly two decades on trading floors in Chicago. After the markets closed many traders and brokers unwound from stressful days in local pubs and restaurants. In these post-market “meetings” we talked about family, sports and other non-trading topics, but mostly we discussed the day’s events and market movement. My friends and colleagues shared knowledge that shaped their trading style. Our discussions frequently included favorite patterns, technical nuances and reactions to fundamental data. One friend liked to countertrade a market if it moved 50% of an average day from the opening price. Another trader always bought or sold the 30-year bond every time it hit the number 10, because for some reason the market often reversed when that price traded. 

Over the years I compiled a list of tendencies that are in my “Trader Toolbox.” Here are a few of my favorites:

• The low or high of the day is made within the first hour of trading more than 70% of the time. That percentage regularly rises when a flag (channel) or pennant (triangle or wedge) forms over a 3- to 5-day period.
• The first hour range is frequently about 50% of an average day range.
• An average day range is often 40% to 45% of an average week range.
• If the first hour range is below average after 3 to 4 days of consolidation with below average day ranges and volume, the odds significantly increase for an extraordinary vertical move.
• An overbought/oversold situation arises when a market reaches an average week range in 48 hours.
• If the range over a 12-hour window reaches 175% of an average day, it is deemed overbought/oversold.
• When the speed of a move reaches overbought/sold status, the next day range is often 75% of the standard. Plus, short-dated short options should start to pay (theta).
• Consolidation phases often begin after a 5- to 7-day trend that finishes with a last thrust that is roughly 1.5 times the length of a standard day range. Some call this an exhaustion or capitulation day.
• Violent vertical moves are common after fundamental data are released. If the move is higher, a 50% retracement typically becomes a support area; if the move is lower, a 50% bounce often provides a resistance zone.
• The most reliable support/resistance areas are levels where a previous breakout or trend commenced. This could be a test of a top or bottom of a channel (flag formation) or a pennant (triangular shape).
• Institutional traders are most active in the first hour and last 30 minutes of the trading day.
• The first 60 minutes set the beginning balance of a session. This is generally the highest volume and most liquid time of day. An extension higher after the beginning balance is an indication that institutional traders are bullish, and an extension lower after the first 60 minutes of the day means the big players are bearish.
• A close in the upper quadrant of the day range typically leads to higher prices the next session. A close in the lower quadrant of the day range is generally bearish.
• When speculating move stop loss order to entry once your trade is profitable by 40% of an average day range.

These axioms help me gain better trade location for both entering and exiting positions.

John Seguin, Market Taker Mentoring