March 08, 2010

Most Effective Indicator you’ve NEVER Heard Of

You open your charts @ 8:00am EST on Monday, and you begin to prepare for the trading day ahead.

You set up your indicators, you mark support & resistance, and you get your trading DOM ready.

You go over your trading rules, you remind yourself about trading with discipline, and you’re alarm goes off @ 9:15am EST to warm you of the US Market OPEN at 9:30am EST.

The market opens; you begin to watch for price patterns, volume, momentum, market profile, and numerous other techniques you’ve learned.

A breakout pattern begins to set-up; you check your rules, no news coming, so you get into your first trade with confidence.

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5 Seconds go by…what do you do next?

Should you let the trade run?

Should you cut the trade early to avoid a loss…but also avoid a win?

There’s no rule for this situation, price is just sitting there, doing nothing!

This story is something that all traders can relate to.

Your rules line up perfectly, but the trade doesn’t work out as planned…why not?

What else can we look for? What other indicator (if any) could you enlist?

I learned the importance of SPEED a number of years ago, and it was just as important as learning to read tape and volume information in the market.

What is speed? And why should we pay attention to it?

Speed is one the things you learn with experience as a trader.

More time in the market and you learn the difference between a FAST & SLOW market, and with that distinction you can then avoid times in the market when it appears to be “slow”

Ask any experienced trader what “slow” means, and they have trouble expressing it though, it’s a discretionary approach to reading the market.

Speed is important to traders of all shapes and sizes:

• Scalpers

• Day Traders

• Position & Swing Traders

No matter what asset you trade or timeframe you use, we all watch speed in the market to tell us when the odds are in our favor.

Speed is defined as the rate in which the market is moving, and this ‘speed’ can be seen in many places in the markets we trade:

• Speed at the Open

• Speed at the Close

• Speed of the Time & Sales Window

• Speed of the Patterns Developing on your chart

• Speed of each Pattern Triggering according to rules

• Speed of the Follow-thru after the pattern triggers, filling your profit targets

• Speed of the Continuation of the move, rather than the failure

• Speed of the Exhaustion of the move

• Speed of the Reversal of the move

• And the process starts all over again….

There are lots of times when speed is important, but let’s focus on the big three:

• Speed of Tape

• Speed of Set-up

• Speed of Follow-thru

Speed of Tape

This is the speed of the orders coming into the market, and can be seen on your time & sales windows.

Some traders will use technical indicators that measure the pace of the time & sales window to measure its speed, but many traders will also rely on their 2 eyes to do the work.

We want the speed of the tape to be as fast as possible at your time of entry, and we watch the speed of the tape throughout the entire move.

From entry to exhaustion, the speed of the tape is the most under-valued tool for understand when price will turn around and reverse, which makes the speed at the time of exhaustion a very effective way of identifying when to exit a trade or take profits.

Speed of the Set-Up:

Look for the patterns to set up quickly, in fact, we like to see less than 5 minutes for the pattern to develop. This can be applied to slower timeframes with a multiple of 1 x your fast timeframe chart (email me for more info on that if needed).

As the pattern is setting up we look for it to do so quickly. We don’t want a pattern taking too long, so look for the ‘slow’ times in the markets to also show patterns that are ‘slow’ as well.

Time is NOT on our side, and the longer the pattern takes to trigger the entry, the more dangerous it becomes.

A good example of a simple rule to use: if the pattern takes more than 5 minutes to trigger, wait for the next one, its taking far too long to trigger.

Speed of Follow thru:

This aspect is vital to your long term success, and it’s the difference between a 10-tick winner and a 100-tick winner.

Do you know when to hold it and when to fold it?

Speed of the follow-thru describes the way the trade finishes up:

• Did the trade go for 10 ticks in 10 minutes?

• Did the trade go for 100 ticks in 10 seconds?

• Is the market EXPLODING after a few ticks in your direction?

• Is the market STRUGGLING to move in the direction of the trade?

• Is it happening fast? If not, this market is one to avoid

Simply put, if I notice that my trades are only going 5-10 ticks in a very hesitant move, I will be very careful trading that market because its not showing the likelihood of moving in large chunks, which makes us more money.

Beware of trading a market that is slow to move after entry, it will make it hard to recover from a loss, or to make any real profits that day because it lacks the ‘follow-thru’ it needs to be a wide-range market for that trading day.

What tools do we use to watch for speed in the market?

• Time & sales window

• Fast timeframe (1-min, 4-Range, 89-Tick)

• Technical Indicators that measure the Pace of the Tape

No matter what type of trading you do, your level of experience or your objectives as a trader, SPEED will always have a very important part in your trading decisions.

Understanding how to use speed won’t happen overnight, but with the time in the market you need to gain the experience, SPEED will always be the most effective way on increasing the CONSISTENCY of your trading in the future.

Tomorrow morning when you open your charts, take a minute to consider the SPEED of the tape, the set-up, and the follow-thru of the market you are about to trade.

Your hard earned risk-capital will thank you for it!

Stick to those rules, and watch the speed!

- Joseph James 03-07-2010

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