1) Who is inward the market?
2) How are they positioning themselves inward the market?
At the most basic level, I desire to generate an estimate--as early on inward the 24-hour interval every bit possible--whether the 24-hour interval is shaping upward every bit a potential tendency 24-hour interval or hit day.
Who is inward the marketplace is addressed past times volume. As I've stressed inward the past, book is of import because it correlates quite highly alongside volatility. Knowing whether we're trading higher upward average, average, or below average book gives us of import clues every bit to whether we're probable to conduct maintain a daily hit greater than, equal to, or lesser than the average range. That, inward turn, impacts whether moves are probable to extend or contrary on a given fourth dimension frame.
So let's conduct maintain Friday's merchandise every bit an example. We had a real strong payrolls number, hence traders were justified inward thinking that nosotros could conduct maintain a catalyst for a strong marketplace day. I was less convinced of that, given weakness that had been showing upward inward the market. During the showtime 5 minutes of trading inward SPY, nosotros transacted merely a chip over 2 1000000 shares. The average showtime 5 infinitesimal book inward SPY over the past times 3 months has been a piddling over 3 1000000 shares. During the adjacent 5 minutes, nosotros transact well-nigh 1.8 1000000 shares. The average for that 5 infinitesimal menses is almost 2.5 1000000 shares.
You larn the idea.
Right out of the box, nosotros conduct maintain pocket-size participation inward the market. When book is below average, it's non that marketplace makers conduct maintain taken the 24-hour interval off. Rather, it's the shorter together with longer-term directional participants who are non active. It is much to a greater extent than hard to larn a vigorous tendency 24-hour interval when those directional players aren't playing. So y'all could say yourself every pretty story inward the the world well-nigh how the payrolls reveal was a game changer, but marketplace participation inward stocks--at to the lowest degree for the 24-hour interval session--was giving a resounding yawn.
OK, hence ane time nosotros run into who is participating, nosotros tin together with hence conduct maintain a facial expression at how they are participating. Notice the top nautical chart of the NYSE TICK, which is the cyberspace reveal of upticks vs. downticks amidst all stocks inward the NYSE universe. (Chart is for the 24-hour interval session, where each bar = 5 minutes). What practise nosotros run into early on inward the session? First, at that spot is no meaning selling. The average depression figure for each 5 infinitesimal menses is a piddling less than -300, alongside a measure departure of a piddling over 300. Early inward trading we're non getting fifty-fifty a measure deviation's worth of selling. Once again, nosotros tin say ourselves all nosotros desire well-nigh how weak the marketplace has been coming into the 24-hour interval session. There merely aren't whatsoever sellers inward meaning proportion to move flora early on inward the day.
We besides don't run into a tremendous surge of buying early on inward the day, every bit nosotros larn solely ane upside reading inward the showtime one-half hr exceeding +600. But if nosotros facial expression at the xanthous null draw of piece of occupation inward the top chart, nosotros tin run into that we're spending to a greater extent than fourth dimension higher upward that draw of piece of occupation than below. Net activeness is skewed modestly toward the purchase side--more because of the absence of selling involvement than the presence of statistically meaning buying.
That stance is confirmed past times the bottom chart, which tracks the per centum of NYSE stocks trading higher upward their day's volume-weighted average price. In a strong or weak trending market, the slap-up bulk of stocks volition merchandise higher upward or below their VWAPs. When nosotros conduct maintain to a greater extent than residue betwixt buying together with selling pressure, that per centum volition facial expression pretty mixed together with non deviate far from 50%. For the most part, early on inward the day, nosotros hovered betwixt 50 together with 60%. Again, a pocket-size skew to the purchase side.
Within the showtime minutes of the trading day, nosotros tin generate a reasonable guess of whether the 24-hour interval is shaping upward to move a busy or serenity one; a trending or balanced one. Note that this has aught to practise alongside nautical chart patterns, moving ridge structures, or economical fundamentals. It's based upon how participants are genuinely behaving inward the marketplace. We together with hence tin rails that participation over fourth dimension to seat whether the marketplace is getting stronger, weaker, or to a greater extent than balanced together with whether it's getting busier or quieter.
Many problems inward 24-hour interval trading occur when nosotros impose our ain views on markets together with practise non focus on how markets are genuinely behaving. Problems besides occur when nosotros practise non rest sufficiently flexible to continually update our views of how markets are behaving. With a strong payrolls number, nosotros could conduct maintain imposed a stance of a big marketplace day. We could conduct maintain conducted studies of how the marketplace has behaved alongside past times big payrolls numbers together with used those to guide our expectations. It's fine to operate into the 24-hour interval alongside a hypothesis, but every bit Ayn Rand liked to hollo for out, the ultimate arbiter is objective reality. And that reality told us that, both inward grade of participation together with the skew of participation, this was non shaping upward to move a big day.
A reader of late asked well-nigh trading alongside a positive mindset. When I am trading well, I don't conduct maintain a positive mindset. I besides don't conduct maintain a negative mindset. I conduct maintain a real opened upward mindset. As a trader together with every bit a psychologist, I'm best off listening earlier acting.
Further Reading:
Keys to an Upside Trend Day
Identifying Downside Trend Days
Identifying Trend Days With Intraday New Highs together with Lows
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