Market Study Bootcamp: Part 2 – Popping the Big Questions

It’s been a long time. Much longer than I would have liked since Part 1 of this series. Things have been extremely busy here on The Ranch and, as they say, better late(er) than never.

But here it is, the next installment of the Market Study Bootcamp. We’re ready, dressed in our white lab coats, clipboards in hand, pocket protectors stuffed, glasses taped, to do a little information science.

Since all good science starts with a question, we will too. That question is “what does our instrument look like?” When I say look, I don’t mean literally look, as in what appears in the reflection when you hold a chart up to the mirror. I mean what are its general characteristics? As I posited in Part 1, I think in order to be successful trading any instrument, you really need to know it like a spouse, sibling, parent, best friend, etc. You need to develop an intuition for how it behaves and what makes it tick – so to speak. But that’s a qualitative kind of knowledge, and in order to gain that kind of intuitive understanding, it can help to first get to know an instrument quantitatively.

That can seem like a dauntingly big job. But not necessarily so, if you focus on the big picture and refuse to be mired in the minutiae. Case in point – below are the four major elements I want to understand as an intraday trader trying to play the swings:

  • How frequently does it swing? I want to know how many times per day it tends to swing or rotate. This is a key facet of any instrument. I’ve said many times before that you really should trade instruments suited to your temperament and natural disposition. For example, do you prefer quick, all-out effort of sprinting or the strategic and duration challenges of the marathon?
  • What is the magnitude of the swings? If we traded every swing precisely and perfectly, what are the most frequent potential rewards for any risk taken? This should be self-evident in terms of its importance. You’re in the risk management business as a trader, and a huge part of managing risk is understanding “whens and whethers” of the possible rewards.
  • How long do the swings take? What is the distribution of swing durations?  How long we should be waiting for a swing to play out is again a key facet of becoming intimate with your instrument. Is its style of price action fast and furious or is the tempo generally slow and low? Again, it’s all about whether you and your instrument are compatible. There’s no right or wrong answer here. If it feels good do it, I say. ;-} If not, find another partner.
  • When are the swings swinging? Again, an important compatibility question. If the instrument in question is at its most frisky early in the session but you’re not a morning person… well… let’s leave it at that. This is a family trading blog. ;-}

In any case, we’re going on our first “date” today with West Texas Intermediate Crude Oil, also known as NYMEX Light Sweet Crude Oil (symbol: CL). Want to be a fly on that particular wall?

Read the Instrument Spotlight Study – NYMEX Light Sweet Crude Oil here »

Until Part Three… trade ’em well.

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