The one thing short-term traders should know is that size matters. It is of vital importance at all times to know whether the traders in size are leaning to the buy or sell side. Because volatility is intimately connected to volume, the presence or absence of large traders will determine the amount of movement in the market. The degree to which large traders are hitting bids or lifting offers will determine the market's tendency to sustain directional moves (i.e., trend).
(IMO, understanding--really understanding--those last two sentences will keep many traders out of bad trades and bad markets).
Let's take the opening period of Friday's trade as an example. I'm looking at the time period just before the NYSE open to the end of the first half hour of trade (9:25 AM - 10:00 AM ET) in the S&P 500 e-mini (ES) market. During that period, we had 13,954 trades that included 212,684 contracts.
Of these trades, 5148--almost 40%--were one-lots. Those one-lots accounted for about 2-1/2% of all market volume during the opening period.
Conversely, 431 trades--only about 3% of the total--were trades of 100 contracts or more. This group of large traders, however, accounted for 82,127 contracts traded, or nearly 40% of the total.
So there you have it. Give or take a bit, the smallest 40% of trades account for 3% of the volume, and the 3% of largest trades control 40% of the volume.
A number of excellent short-term trading guides can arise from these observations. For instance, we can compare the number of large trades occuring during a time period and compare it to the average number of large trades that occur during that time period, and we'll have a rough idea of the degree to which large players are dominant and volatility can be expected.
We can also parcel out the large trades that occur at the bid price (meaning a large seller is anxious to exit the market) vs. the large trades that occur at the offer (a large buyer is eager to get into the market) as a way of tracking the moment-to-moment sentiment of large traders.
Trade by trade analyses of market action that capture the sequencing of large trades at market tops and bottoms are also quite revealing, as they display how one-sided markets (those dominated by buyers or sellers) become two-sided when other timeframe participants perceive that the market has moved too far from value. That period on Friday from just before the open to the end of the first half-hour of trade neatly caught such a sequence.
There's value in looking at charts of markets that cover many days. That's viewing the market through a telescope. The short-term trader, however, can also benefit from observing the teeming life under the microscope. What moves the market in the short run is not what fundamentally moves the market over the long haul. Taking advantage of the data appropriate for your timeframe is all-important.
Tonight, I'll post a chart to the Trading Psychology Weblog that illustrates some of these ideas.