A Fundamental Trading Reality

If I had to identify one fundamental trading reality of stock index trading, it would be this: Who is in the market and how active they are will determine the nature and extent of market movement. A greater number of large traders conducting a larger number of trades leads to greater volatility and greater likelihood of breakout, trending moves.

One reason this is so important is that current activity and volatility are well correlated with near-term future volatility. In my Trading Markets article scheduled for Friday publication, I show how traders can use information from the first 45 minutes of trading to predict opportunity for the remainder of the day. I will follow up on the topic in the Trader Performance section of my personal site this weekend.

There are many other applications of this information, as well. Figuring out exits--how much you can reasonably expect to take out of a trade--is a function of volatility. Whether or not to even participate in the marketplace might be a function of expected movement. The past is not a perfect predictor of the future, but it does provide meaningful guidelines.