Monday, March 24, 2008

Making the Good Trade: The Importance of Preparation


Notice the distribution of the NYSE TICK early this AM. We have been solidly above the zero line, indicating that the vast majority of NYSE issues have been trading at their offer rather than bid price. That's a clear indication of bullish sentiment among large market participants.

If you had been sitting by my side at 8:34 AM CT, just four minutes into the session, you would have heard me exclaim, "Holy Shit!" The reason was that we had a couple of sell programs hit the market and the TICK could not even hit zero. (We got as low as +210). That suggested very solid buying interest out of the gate. Given that we were near multi-week resistance (per the recent post), it suggested to me that: a) we would test that resistance; and b) we had a good shot at breaking it.

Reading these patterns of short-term buying and selling interest early in the session can help you frame hypotheses regarding market action that form the basis for solid trading ideas. Had I not been very familiar with TICK patterns within the first five minutes of trading, however, the idea and the trade would not have been possible. This is where screen time and the internalization of those market patterns become all-important. No amount of trading psychology can substitute for that kind of preparation.
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6 comments:

Paul said...

Thank you for this post.

I appreciate it because:

1) It's an informative lesson about the TICK.

2) It's very timely. It helps in making an intraday trading decision.

I appreciate all the other posts as well.

I hope things are going well with you.

Take care.

Marco said...

Hi Paul, how did it become apparent to you that a couple of sell programs hit the market at around 8.34am? thanks

Matt said...

What a strong bullish day. I joined a trading chat for the first time and every message was about short trades and selling the market. Whereas it was so obvious that the overall direction is up. It's sad that traders always want to fight the market. Read it for yourself.

http://pricetrader.blogspot.com/2008/03/live-chat-transcript.html

Right after open the bulls swung it up which could not possibly speak well for the bears.

Charles said...

Doc, just wondering how you know when a large program trade hits the mkt? What tells you this? Thanks! -CU

Brett Steenbarger, Ph.D. said...

Hi,

Thanks for the comments on this post. In general, you can infer program trading activity from significant premiums or discounts of the futures to cash and from the simultaneous upticking or downticking of related groups of stocks. The $TIKI (TICK for the 30 Dow stocks) is quite useful in this regard, because so many of the Dow issues are common components of baskets traded by programs. Ditto the NASDAQ TICK. When you see large gaps in the TICK readings, it's often a sign of program activity.

Brett

Christian said...

Thanks Brett, this post was very informative and will be useful in adding more tools to my opening gap plays.