As a former broker at the exchanges in Chicago, I had the privilege of reporting price action in its most basic form, open outcry in a trading pit. In these spheres, where traders battle to buy low and sell high, it was chaotic to the untrained eye. When in fact there were incredible amounts of information that a trained eye could decipher.

One of my early jobs at the Chicago Board of Trade was to report what was going on in the pits to professional traders using a squawk box. This box or speaker was often a centerpiece in trading rooms around the globe. The information broadcasted was frequently used to make trading decisions. So, what information were these institutional traders seeking?

Over the years I recorded the questions traders asked on a regular basis. From those inquiries I compiled a trader’s checklist. I figured if I could answer these questions when clients called, they would gladly pay my brokerage to execute their trades.

I used this same list to create trade strategies. Over the next few weeks I will review the questions and discuss answers that pro traders seek.

First, we must define fair value. And once we define value we can determine momentum, which is the second most popular question from traders. Next on the list is identify risk. Risk can be defined as a change in momentum. If a trader has a long position, he may request the price at which momentum turns negative. Thus, defining risk immediately after entering a trade is imperative. Another frequent question is, where do I get in? In other words, where is support if looking to buy and resistance if looking to sell. When to enter the market is known as timing. This often pertains to what phase the market is in, trending or consolidating. Another common question is, where is the market likely to go? This is thought to be profit projection. And along with projecting profit is a method to lock in profits as the market moves in the trader’s favor. This is called using trailing stops.

The luxury of gathering information from trading no longer exists. So, next week we will start from the top of the list and discuss ways to define fair value using charts in lieu of trading pits.

John Seguin, Market Taker Mentoring