I’ve worked with many professional traders in my almost 20 years at the Chicago Mercantile and Board of Trade exchanges. Since 2002 I’ve been writing daily newsletters for futures traders, building trading systems and educating traders. Professional traders tend to focus on fundamental data, economic reports and order flow to make decisions. Some use charts and technical indicators, while others enter trades following an algorithmic or automated system. Some traders incorporate several disciplines into their decision-making. They all seek answers to make thorough trading decisions.

Reading Order Flow

One of the most valuable services I provided was to relay information from the trading pits. Off-the-floor traders frequently called to get 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 the price would rise, and that information might allow a trader to hang onto a long position and realize more profit. 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.

Think Like a Pro

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

• Is there event risk? Fundamentals move markets. Economic reports, earnings, Fed speakers.
• Who controls momentum? Interpret near-term direction. Pros tend to be most active in the first hour and last 30 minutes of the session.
• Is the timing right for a trend to begin? Breakouts are most common after a flag or pennant formation.
• How far will the market move? Average true range can be used to project profits and risk.
• Where will value develop? Markets move from balance to imbalance. The balance or consolidation phase often occurs after an above vertical move.
• Where are support and resistance levels? Buyers look for support levels and sellers look for resistance zones.
• Where to risk? Identify prices where momentum reverses.
• Is the market too rich or too cheap?  Define overbought and oversold situations.

Each morning before sending trade recommendations I try to answer the questions above for the most widely traded sectors. Those markets are securities (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, a quick jump in interest rates usually has a negative impact on stocks and a positive one on the dollar. And a positive move in the dollar frequently has a negative impact on gold. These correlations happened recently following the higher-than-expected consumer inflation index on April 10.

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