Thursday, November 30, 2006

Trading the Market By Knowing *Who* Is Participating

At the close of the day, TraderFeed will have finished a year of publication. I want to thank all readers who have made this a most rewarding experience. As a note of thanks, I'm going to suggest a trading pattern that is quite powerful and that just happened to make me a few pennies this morning.

The pattern occurs when one or more of the big global markets--the dollar, gold, oil, or treasuries--breaks out to new highs or lows. The more significant the breakout--and the more markets participate in the breakout--the better. Today, we saw the Euro break out to yet further highs vs. the dollar and the 10-year Note break to new highs (i.e., yields broke to new lows).

From the point of the breakout move (just as it's begun), trace the volume in the stock indices to see if: a) volume picks up; b) the distribution of volume (at bid vs. offer) becomes skewed; and c) the NYSE and Dow TICK become skewed. Specifically, you want to see if large traders enter the market around those points and whether they're dominantly entering on the buy or sell side.

What you're tracking are the global macro participants in the marketplace. Many of these are hedge fund and investment bank traders, and they have the size to run the locals over. When you track the global markets *and* the trade flow, you start thinking like the macro traders yourself and you can ride their coattails.

IMO, this may be the most valuable and practical blog post I've come up with this past year. Markets are global and markets are interrelated. If you focus only on *your* market, it's easy to get run over when the big money managers act on a theme you don't even see. If you start thinking like the pros, you may just start trading like one.

30 comments:

BryanW said...

*Traderfeed Birthday*
Doc, thank you for all of the studies you have posted over the last year - there have been literally hundreds of them. You are a never ending source of market edges.

I don't know of any other website that provides better ideas and inspiration to help stock index traders come up with new ideas and trading strategies. Some of the other websites I'm thinking about charge quite hefty fees too. Thank you for sharing your ideas and enthusiasm so freely.

Brett Steenbarger, Ph.D. said...

Many thanks, Bryan. A core theme of the blog is that confidence in trading comes from having an edge, not the reverse. At some point, I would like to do a live, full-day seminar where I can just take everyone through the process of setting up data and spreadsheets to analyze a variety of market patterns and figure out potential edges. I don't know of anyone doing that kind of education/training--and it's *so* valuable--

I greatly appreciate your support--

Brett

voodster said...

Brett Happy Birthday!

Not a day goes by that I don't check in on your site - it is a wonderful resource! The information you provide is unrivaled. Thank you so much for sharing your insights on the inner workings of the markets.

Brett Steenbarger, Ph.D. said...

Thanks; I really appreciate it, Voodster. And thanks for your many fine questions and comments on the site. Do stay in touch--

Brett

WALL STREET said...

I'm new to this blog, but I do enjoy reading it.
Thanks.
P.S.
Right now I'm reading your book, and I love it!!!

Brett Steenbarger, Ph.D. said...

Thanks, Wall Street; I appreciate the feedback and look forward to staying in touch. Already in its short life, the book has brought me in touch with some interesting and talented traders. That's been very rewarding--

Brett

Justin Lenarcic said...

Congrats Brett. A year goes by fast when you're having fun doesn't it? Keep up the great work and thanks again for your consistent support.

Brett Steenbarger, Ph.D. said...

Thanks, Justin! I appreciate the support and especially appreciate your good work on the Portable Alpha blog.

Brett

Anonymous said...

I could not agree more with the "who is particpating" comment. I was at the CME in the 80's and watched the Euro in its infancy. Tbills were the market to trade then and key was watching the fed enter and exit the market. Limit moves were common place back then. When the dollar took a huge move all other markets moved in tandem right down to the pork bellies. Right on Brett.

Favorite read Tulipmania and the madness of crowds.

D TradeIdeas said...

Our pingback Happy Birthday wishes ... many more to Brett!

Brandon Wilhite said...

Dr. Brett,
Congratulations on reaching the one-year mark. This truly is a great resource. I really appreciate your last two posts as it further fleshes out for me the thinking process you go through (the 'transtheoretical' part of it...which is why I visit :) Anyway, I also think a full-day seminar such as you propose would be extremely valuable. I do a lot of spreadsheet analysis myself, but I'm sure it is different from yours...it would be good to learn.

Keep up the good work and again thank-you.

BW

Brett Steenbarger, Ph.D. said...

Thanks Martin; you're absolutely right about how those markets were--and still are--linked. An interesting trading idea to test would be to see whether volatility in the dollar or bonds spill over into volatility among equities.

Brett

Brett Steenbarger, Ph.D. said...

Hi David,

Thanks for those birthday wishes. I've appreciated your support and the good work you've put into Trade Ideas.

Brett

Brett Steenbarger, Ph.D. said...

Thanks Brandon,

I appreciate the kind words; feel free to share some of your spreadsheet analyses some time! I'm always happy to compare notes with traders who do their own research--

Brett

Michael said...

wow, time is really flying. Happy Blogiversary!

Brett Steenbarger, Ph.D. said...

Indeed, Mike; the time has flown by quickly. Thanks for all your support and thanks for your excellent blog, which has certainly been one of my inspirations--

Brett

Anonymous said...

What a great post to punctuate the one year mark. You have been so generous sharing your ideas with your blog, while challenging your readers to think in new ways. Keep up the great work.


DT

Brett Steenbarger, Ph.D. said...

Thanks, DT, and thanks also for your excellent blog. I have a feeling that this post will become relevant in the weeks ahead as we reprice currencies and interest rates.

Brett

Anonymous said...

I have no doubt it will. Not sure if you've come across John Murphy's book on Intermarket Relationships, but it is an excellent read. Traders sometimes get too focused on a specific market, while not realizing how powerful these macro economic moves are. Currency valuation has a huge impact on stock and commodity prices. Congrats again on the 1 year mark,

DT

Brett Steenbarger, Ph.D. said...

Thanks DT,

Murphy's book is a great recommendation. It does a fine job of outlining the relationship between moves in currencies, interest rates, and equities.

Brett

Trader-X said...

feliz cumpleaños

Paulo de León said...

In Spanish. "feliz cumpleaños" y muchas gracias.

Brett Steenbarger, Ph.D. said...

Thanks, Trader X, and thanks for your excellent blog!

Brett

Brett Steenbarger, Ph.D. said...

Y muchas gracias to you as well Paulo for all your support and interest, as well as your posts!

Brett

yinTrader said...

Gong xi, ni, Brett!

I must thank you for giving so freely your works in your TraderFeed , especially.

While I just can't seem to get enough like a sponge , absorbing without giving.....

Hsieh hsieh, ni.

Brett Steenbarger, Ph.D. said...

Thanks, Yin; the best giving is the gift of friendship--

Brett

Anonymous said...

Here's to many years more

*qa-ching*

Declan

Brett Steenbarger, Ph.D. said...

Thanks, Declan, and thanks for your good work on the blog.

Brett

hp said...

At some point, I would like to do a live, full-day seminar where I can just take everyone through the process of setting up data and spreadsheets to analyze a variety of market patterns and figure out potential edges. I don't know of anyone doing that kind of education/training--and it's *so* valuable--

Have you done this. You have extraordinary insight! Would be very glad to participate in such a seminar.

mikpo

Brett Steenbarger, Ph.D. said...

Thanks, Mikpo, for the interest and the idea. At some point, if I can get a suitable conference sponsor, I'd be delighted to devote a session to using Excel to find an edge in markets. I've pretty much abandoned the traditional seminar circuit, so it's difficult to arrange events.

Brett