I am a short term trader technical trader. What I mean by that is that my entire trading method and system is based on technical analysis; with entry and exit are based on technical analysis. However, I readily admit that fundamentals are important in any market – in fact I will readily admit that fundamentals ultimately are the driving force in all markets. That may sound like a contradiction, so let me explain; it’s about time. For the brief period of time that my trades are active fundamentals usually do not matter because the market psychology is operating with the knowledge of all fundamental data that has been reported to date.

A technical trader cannot completely ignore fundamental data because of time. Some fundamental data events, such as the monthly release of the jobs report are important market movers. Technical traders must be aware of when certain fundamental events are about to occur – and, at least in my opinion, stay out of the market until that fundamental event has occurred and been digested by the market.

And time is important to technical traders for another reason. There are two words in the above two paragraphs that need further elaboration. In the first paragraph we stated that the market operated with the knowledge of all fundamental data to date. With all due respect to the market, knowledge of, as I use it her, does not mean the same thing as understanding. Knowledge of an event can be gotten quickly – understanding how that knowledge will ultimately affect the market can take time – sometimes a great deal of time.

That brings us to the second term in the second paragraph; digested. When a fundamental event is reported, such as the jobs report, the market begins the process of digesting the data. This can lead to a lot of volatility – as seen in the chart shown in Figure 1.

Figure 1 E-Mini 1-10-2014 – 2500 Ticks per Bar

The green vertical line is the first bar completed at 7:30, the time at which the jobs report is released. In the next six minutes there were 11 bars added to the chart – almost two bars per minute. The e-mini typically trades on this chart at about 4 bars per minute. The movement between the white arrows (moving from left to right) was, in dollar terms, about $300 between the first and second white arrows, and $500.00 between the third and fourth arrows.

I did trade a portion of this action and was very pleased with myself as I entered short very near the top at the second white arrow. Then I did something stupid – something that I constantly rail at other traders about – I left an open trade unprotected and went for a cup of coffee, just after where the third arrow is located. I was only gone three minutes – however that cup of coffee essentially cost me about $300.00.

But the point of this post is not about my brilliance for getting in at the right time – nor even about my stupidity for letting a great profit slip away (I eventually had a pretty good day, but it should have been a great day).

The point we wanted to make is that the market doesn’t always know what to make of fundamental data until it has time to digest it. And sometimes (this may well be one of those times) even after digesting it, the market doesn’t understand it completely and marches off in a direction not consistent with the fundamental data. Such is the mass psychology of the market.

Take a look at the whole day’s activity as a whole. The day began at the bottom of the white price bar to the left of the chart – at a price of about 1835. It ended the day at a price of 1838.50; up a small amount. Prior to the report the market anticipated that price would go up as a result of the report – the report was not good and price came down fast – only to later to go back up to near the high of the day – go figure.

To a technical trader, such price action indicates that the market thinks that the jobs report was good for the market. The jobs report seemed pretty dismal to me; but the market went up. That dear reader is why I trade on technical analysis rather than fundamental analysis.

That explains why I trade the E-mini with a strong predisposition to be alert for every opportunity to go short. Personally, I think that this market is cursing for a bruising. But, I must constantly remind myself of Lord Keynes statement, “The markets can stay irrational longer than you can remain solvent.” Trade with care.

 

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