Wednesday, March 11, 2009

Coaching Your Trading: Twitter, Decision Support, and Trading Reviews

In a recent post, I proposed the after action review as a useful tool for coaching traders. If we were to conduct a review of yesterday's trading, one important focus would be how traders traded the early morning portion of the session.

Let's take a look at a few of the Twitter posts from that AM:

6:26 AM CT- Note 3 day range in ES; SPY targets: pivot = 68.49; R1 = 70.55; R2 = 71.24; R3 = 71.93; S1 = 66.42; S2 = 65.73; S3 = 65.04.

8:42 AM CT - Watching TICK, financials to see if we sustain move above yesterday high in ES for R1 target or if we revert to pivot.

8:53 AM CT - We hit R1, as TICK has stayed quite positive on any pullbacks. Need *significant* selling (neg TICK) to effect a reversal.

The first "tweet" emphasized the context of morning's trade: we were in a three-day range. Right away, you want to entertain two hypotheses if we see early buying: any market strength will die out and we'll revert to the mean of the range; or buying will attract further interest and we'll sustain a breakout from the range.

This is where the targets are very helpful. A reversion into the range, gives us a price target at the market pivot. An upside break out of that range targets the R1, R2, and R3 price levels. What we need to do in the market's opening minutes is handicap the odds of one of those moves if we open near the top of the range.

By the second Twitter post above, we've already broken above the range. The post tells us that financial stocks are leading the charge (that has been a leading sector in recent sessions) and that NYSE TICK is key to sustaining the breakout. After all, if the breakout is genuine, we should see many more stocks transacting on upticks than downticks.

By 8:53 AM, we've already hit R1, as TICK has stayed quite positive. The Twitter post observes that we need to see *significant* selling to reverse this powerful breakout move. Recall from previous research on the blog that TICK readings are not significant unless they exceed +800 or fall below -800. To that point, we didn't even get a single -500 reading.

Let's now add a few other items to the mix that can help you identify upside breakout days. The green line is a 20-period VWAP line; observe that volume-weighted average price is rising and the ES futures are soaring in early trade above their line. That is a sign of a trending move: price stays above VWAP and VWAP is rising.

Second, observe that the market opened with several big green bars: price was moving (high volatility) and price was moving higher. This is the essence of the Power Measure that I described in the previous post. When directionality and volatility are in sync, we have a trending move.

Finally, note the expanded volume on the rise. Indeed, the volume in the first three five minute periods of the ES futures was about 200,000 contracts, close to the average volume (243,447) for the typical opening *30* minute period. (Relative volume norms are posted in my weekly indicator reviews).

Now, here's the important psychological part. Many traders who don't trade the initial breakout move will fret that they missed the move and will convince themselves that they don't want to "chase the market". So they sit there with a certain part of their anatomy in their hands and watch the market continue higher.

Two problems with that kind of thinking: First, it is backward looking. Instead of focusing on a move that you *didn't* trade, you want to be looking for where the next trade would be coming from. That is what those price targets from the first Twitter post above are for: if you miss the break above the previous day's high, then you wait for a pullback in TICK and play for a move to R1. If you miss the move to R1, you wait for a pullback in TICK and go for R2. As long as volume, volatility, and TICK are on your side, you want to trade with the trend.

Which gets us to the second problem with the "I don't want to chase" risk aversion: it fails to identify what is happening in the marketplace. In a range market, you surely don't want to trade momentum and buy strength or sell weakness. But if you have transitioned to a trending market, you want to ride strength or weakness. The trader who doesn't want to chase is locked in the previous, range bound mindset. The whole purpose of looking at indicators such as volume, volatility, TICK, ranges, and targets is to update your thinking so that you can revise your trading tactics.

I believe this illustrates some of the coaching potential of the Twitter application: real time market observations aid decision support. On days in which I'm not on the road working with traders and portfolio managers, I will use Twitter to help you (and me) frame trading ideas and hypotheses. (Subscription to Twitter feed is free via RSS). Then, after the morning or day's trading, you can conduct an after action review to see what you caught and what you missed. Such a process, day after day, is what can accelerate a learning curve and turn market hindsight into foresight.