Friday, March 20, 2009

Morning Preparation for Trading

One of the most valuable trading practices, I've found, takes place before markets actually open. It's the practice of framing "what-if" scenarios for the day, so that you're prepared to act when your market hits crucial price levels. Note that I emphasize scenarios in the plural; the idea is to be prepared for a variety of situations, not to get locked into any single one. The goal is to promote mental and behavioral flexibility, not to pull out a crystal ball that will entice your confirmation bias.

A trader I work with called me yesterday and shared how he profited nicely from the Fed announcement. I was initially surprised, because--going into the announcement--he was leaning the wrong way. He had played out the scenarios in his head, however, and was prepared for an announcement that the Fed would be buying Treasuries. Very shortly after the news came out, he flipped his positions and, from that point forward, made a very nice profit.

The combination of an open mind and an ability to quickly and decisively act upon fresh developments is something I've found in successful traders. Much underperformance comes from the inability to keep the mind open and the inability to be decisive when markets shift.

Above we see a snapshot of an hourly chart of the ES futures just before 7 AM CT. Recall from my Twitter posting yesterday afternoon that 778 was important intraday support. An attempted rally from that point failed late in the day, and we moved lower. Observe also that this support area roughly corresponds to the level at which we launched the upmove following the Fed announcement.

During pre-opening trade, we have moved smartly above that 778 level (blue line), placing us back in the prior day's range. (Green line is 20-period volume-weighted moving average). I am going to be watching that level closely in early trading. If early selling cannot take us below 778, I'm going to expect a bounce well into the previous day's range, with the day's pivot as an initial target. I'll be watching the distribution of NYSE TICK and the advance-decline ratio ($ADD) for confirmation that buyers have the upper hand before committing to the long side.

Conversely, should we fail to hold 778 and we see distinct signs of weakness among those indicators, I'll be thinking about selling bounces for a move toward S1. Should we see weak volume and choppy trade on this expiration Friday, I'll be thinking range market and will look to fade moves away from VWAP and the market open. Most of all, I'll chill in the early minutes of the morning trade to let the market tell me what it's doing.

Going back to the Twitter posts, I have the profit targets set (see 6:30 AM tweet) and written down in front of me; I have the lines drawn on my chart; and I have scenarios laid out. All well before an hour is left before the open, when I can relax, exercise, scope out correlated markets, and update my views.

Whether in sports or trading, so much of the game is won before the initial tipoff, kickoff, or faceoff. Preparation is a powerful psychological tool, because it primes us to act on our perceptions.


Matthew C. said...

Great post.

I think this also falls in line with your "think on a longer time scale context to execute your short term trades" concept you mentioned recently.

I've been playing around a lot with the 800 level and 780ish levels the past few days, and yesterday when the market opened up right around 800 I immediately sold some contracts because of the importance of that resistance level. The market collapsed immediately, eventually winding down all the way to support in the 778-780 area.

oops said...

I recall a while back you had studied trading after hours (night time) e-mini's. I have misplaced that info. Could you re-direct me to it?
I was hoping to find some persistency at night

Thank you, Don

Christian said...


I see that your first Twitter post this morning was at 5:44 AM CT. Does that mean you are up and awake at least 3 hours before the opening bell? Do you find that you have an edge when you prepare that much? I remember you had a post on here a long time ago, which I can't seem to find, where you said that you put in a typical worker's full day of work before most workers' lunch time.

I'm on Pacific time and don't get into our office until about 45 minutes before the open. I trade hard for the first 45-60 minutes then take it easy until 1 hour before the close. I would say I'm a profitable trader during those times.

I don't think that I have the willpower to wake up at 3 AM PT unless I miss my favorite TV shows from the previous night and watch them the next day. I had to watch March Madness and The Office last night! Do you think more pre-market preparation would help me extract more profits out of my trading time frames?

Matthew C. said...

BTW, you inspired me to buy at 780 today and held to around 784. I wasn't expecting anything much higher, and sure enough we didn't get it. But your evaluation that support at 778-780 might be worth a trade encouraged me to give it a shot, and it paid off.


Brett Steenbarger, Ph.D. said...

Hi Don,

I'm sorry; I'm not sure which post you're referring to. I don't trade overnight hours myself, but I do use the overnight range to frame initial profit targets when we open within that range.


Brett Steenbarger, Ph.D. said...

Hi Christian,

Yes, I typically wake up by 5:30 AM CT, though I'm up much earlier on days where I'm on the road working with traders. Not all my early AM hours are spent watching markets; I also use them to blog, exercise, organize my day, etc. Waking early has become a habit for me, not something requiring discipline; very important to productivity when you also have family, work, and trading needs to juggle--


Trader Kevin said...

Christian: "I don't think that I have the willpower to wake up at 3 AM PT unless I miss my favorite TV shows from the previous night and watch them the next day."

That's why God invented TiVo! (Or was it Al Gore?)

"Do you think more pre-market preparation would help me extract more profits out of my trading time frames?"

I trust this is a rhetorical question.