Read Larry Connors' blog – Short Term Trading Strategies
A reader recently asked my opinion regarding the most valuable market indicator. Without hesitation I responded, "Whether volume is occurring at the market's bid or offer price." For the short-term trader, this is an immediate and reliable reading of sentiment. If volume is hitting the bid, you know that market participants are bearish. If volume is lifting offers, you know which way the large traders are leaning.
Here's a screen shot from the market shrink's trade station for Tuesday, September 6th. Notice how the market made numerous attempts between 8:30 AM ET and 9:45 AM ET to test the lows around 1223 on the ES. The red within the bars means that more volume was occurring at the bid than the offer; the blue signifies the reverse. (Volume inside the bars is depicted as number of contracts traded at the bid x number of contracts traded at the offer). You can see volume dry up on multiple occasions as the market dipped toward 1223. You can also see within the 15 minute bar at 9:30 AM that very large volume began lifting offers at 1224.25. Clearly the failure of the bears to take the market lower emboldened the bulls and, from that point forward, the blue volume (transactions at the offer) handily outweighed the red (transactions at bid). In watching the shifting distribution of volume across bids and offers, we gain valuable insight into market psychology.
In my next article, I will tell you about the software that produced this chart and several other tools that help you psychoanalyze the markets. Questions for the shrink? Drop me a line at sonderstel@aol.com.
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.
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