Wednesday, March 25, 2009

The Challenge of Market Engagement

A very experienced trader I was meeting with at a prop firm in Chicago mentioned the challenge of "sustaining your engagement" with markets. His phrase so caught my notice that I whipped out my laptop (thank goodness for wireless broadband) and posted a note to Twitter on the topic, along with a link to a relevant blog post.

What does it mean to "sustain your engagement" with markets? Many of the traders at this firm will place 100 trades or more per day. To put that into perspective, the stock index futures markets are open from 8:30 AM CT to 15:15 PM CT. That's a little less than seven hours. The trader who places 100 trades in a day is averaging about 15 trades an hour or a trade every four minutes.

The only way you can trade with such frequency is if you have a very low commission structure (a very major advantage of prop firms that are exchange members), superior technology (getting orders into the book quickly can make the difference between getting filled and not getting filled), and an ability to concentrate on--not just the tick by tick movement of prices--but the movement of orders in and out of the book.

It's not just paying attention that matters; it's an active processing of information, in which the trader is alert to minute events, such as a series of large trades that are lifting offers. In a flash, the trader sees those transactions, realizes that they are occurring at a key price level, and places the action in the broader context of the day structure (trending/non-trending). Little wonder that my trader performance book (which features two traders from this firm) compares active electronic trading with air traffic control: lots of things to watch continuously, and real risks of lapsed concentration.

Think of all the factors that can interfere with this active market engagement:

1) Distractions, from phone calls to conversations around you;
2) Fatigue, and normal lapses of concentration after long periods of focus;
3) Frustration following bad trades, missed trades, and difficult markets;
4) Worries about losses during slumps;
5) Overconfidence following profits during hot periods;
6) Information overload;
7) Getting caught in fixed views of markets;
8) Equipment failure;
9) Boredom during slow markets;
10) Tunnel vision and loss of big picture perspective

Active traders need strategies that they can use during the trading day to help them sustain their market engagement. My next post in this series will outline some of these strategies.