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.