This tool helps you trade like a pro

Research on expertise tells us that the difference between peak performers and less skillful ones is not just what they think about, but how they think about it. Novice traders see price bars, oscillator readings, and news items as isolated pieces of data. Experienced, successful traders perceive patterns among the data. Let's look at a practical example:

Below we see an interesting development from the pre-opening trade on Wednesday. First we see a narrow overnight range on the Market Delta chart, and we're trading at the upper end at ES 1233.50. Notice that, so far, the market is facilitating trade at the 1232.50 price point and higher: we're seeing more volume coming in at those prices. Moreover, the balance of the volume is being traded at the offer, suggesting that buyers are more aggressive. Note that all this action is taking place below the previous day's average price of 1235. Will we revert to this average or retrace the gains from 5:30 AM ET?

Here's our next snapshot, as we break out to new highs for the pre-opening trade. The market is facilitating trade at higher levels, but now sellers are more aggressive, as we see the balance of the new volume hitting bids.

Now let's look just before the market's open. Selling pressure has continued, but volume has not picked up with the selling. Notice that we've returned to the overnight range, but also notice something important: every time the sellers become aggressive from 5:30 AM ET on, their selling results in equivalent or higher lows. That pattern has not changed during the most recent bar.

About five minutes after the open, we can see who won the battle: The market has returned to its previous day's average price of 1235--a reversion that happens more often than would be expected by chance. The combination of short-term trend following, riding the volume trends, and knowing the odds of mean reversion gave us a reasonable trade idea.

Interestingly, when the market could not make new highs in the following five minutes, the market sold off on expanded volume at the bid and returned to the mean price for the new trading day. (See below). The point here is twofold: When the market hits your target, get out! You entered the trade for a reason; once your reasoning is validated or disconfirmed, you need fresh reasons to stay in the market. The second point is that one must always update one's thinking about the market with the most recent data. Drying up of buying and failure to sustain new highs invites sellers, and that precedes market declines. Within 45 minutes of the market open, we had retraced the entire rise from 5:30 AM ET.

I offer this, not as a template for your trading, but as an example of how to think about trading. Seeing the market in terms of meaningful patterns makes it easier to generate trade ideas and stick with them/reject them based on new data. That is the essence of trader performance.

Brett Steenbarger

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com. He is currently writing a book on the topics of trader development and the enhancement of trader performance.