Thursday, February 18, 2010

Looking for Information, Not Trades

An important implication of the recent post on building intuition is that coming to markets looking for setups to trade is probably the wrong approach if you're trying to maximize your gut feel for trading patterns. By explicitly looking for setups, we lose sight of what might already be setting up. We have no feel for the real time patterns, because we are attending to our expectations and needs--not what the markets are actually communicating.

I've found that running through a checklist of observations--much like a physician runs through a standard list of questions during a history and physical--is helpful in arriving at a "market diagnosis." Those questions pertain to intermarket themes, short-term sentiment, how sectors are moving relative to one another, how we are trading relative to established ranges and VWAP, etc.

Out of the observations will often emerge an insight regarding the likely structure of the market day: trending, range, breakout. That, in turn, leads to fresh observations that suport a gut feel for how the market is likely to trade going forward and whether it will make sense to trade or fade market moves.

When we look for trades, we're putting the epistemological cart before the horse. If we look for the right kinds of information, the trades can come to us.