It's shortly after 5:00 am on a late April day. When I open the sliding glass doors to let our youngest golden retriever out into the backyard, the air is unseasonably nippy for an April morning in Central Texas. I decide on an apple and some soy-milk cocoa for breakfast. As soon as the cocoa is ready, I bring my breakfast into my office to begin preparing for the trading day.
Our oldest golden is still snoozing. Maybe you're like him. Perhaps even if you're an early riser, you're heading off to a downtown office instead of to your home office, and your trading will be done between meetings and other outside work constraints. Most--but perhaps not all--of your preparations might be readied the night before in that case.
What does a trader need to do to get ready for the trading day? I'll invite you to look over my shoulder as I get ready for a trading day. Maybe some of what I do might spark ideas for you. Maybe you'll think my preparations inadequate. Either way, you're prompted to think about your own preparations.
My day begins by looking at futures on U.S. equity indices (/ES, /YM, /NQ and /TF). However, their levels must be put into context before I can make sense of them.
For example, on the morning of April 30, U.S. futures were slightly negative but near the flat-line when I woke. What happened overnight in Asia and Europe, and what economic reports were due here in the U.S.? I typically go to Yahoo! Finance for information on the performance of Asian and European bourses, but other sites offer it, too. The screenshot that April morning that is shown below was from Bloomberg, for example. I apologize for the dark background, as I know some of you like to print articles for review. I did not notice the dark background until the article was edited for publication, too late to go back and switch to another site for this information from late April.
Screenshot of Asian Market Performance for April 30, from Bloomberg:
The Asian markets had turned in mixed performances the previous night. At the time I was checking foreign markets, the important DAX in Europe was chopping either side of the flat-line level.
What could I conclude from putting the performance of our futures into context? Nothing on this particular day, as it turned out. Global markets seemed to be mixed or perhaps uncertain as to next direction. I would have come to a different conclusion if Asian bourses had been lower, European bourses lower, too, and our equity futures near the flat-line but positive. I would then conclude that our futures were outperforming what I was seeing globally. In such cases, there might be some slight strength underpinning our markets.
Each morning, I next look at the economic releases that are expected here or maybe also in Europe, if they are important, with particular interest in those U.S. releases that will be before or shortly after the open. Hint: You can find this information in the weekend Wrap as well as in my Monday Wraps. In the mornings, I want to get updates on the numbers reported overnight. I tend to go to Forex Factory for my information because they list Asian and European releases in addition to U.S. releases, but Econoday's U.S. calendars tend to provide more of the lesser-known U.S. releases. Econoday also includes U.S. bond sales. Depending on the market climate, sales of 10- and 30-year treasuries can impact currency, gold, and even equity markets.
Partial Screenshot from Forex Factory for the Morning of April 30:
Because of width requirements for publication, I did not include the part of this chart that reports on the results. For example, the Eurozone's Flash CPI had already been released. On Forex Factory, the most important releases are tagged in red. This day, we see that the Eurozone's Flash CPI normally might have impacted our markets, too, if there hadn't been imminent U.S. releases that were going to trump anything going on in Europe. The ADP and Advance GDP might (and did) change U.S. futures. The ES contract rose into the 8:30 am (ET) releases but then dropped into a new overnight low afterwards.
What information did I have then, after my initial fact-finding and watching futures action after pre-market U.S. releases? The ADP had indicated that job growth was slightly higher than expected, but the advance GDP was far below expectations. U.S. equity markets appeared jittery after those releases and ahead of the FOMC decision later in the day.
It was time to build a scenario for the day. Remember that this scenario developed real time, before I saw the actual outcome.
I used to write them out each morning, particularly when I was day trading. After all this time, I don't always write them down any longer, but in the beginning years at least, I needed a written scenario for reference. That kept me from being too influenced by emotion in the heat of the action.
It's not that I always believed my scenarios would play out just as I had constructed them, but by writing out or thinking about the most likely scenario, I would have a benchmark against which to test the day's action. That could be particularly useful early in the day when trading behaviors are least to be trusted. I'd find out rather quickly whether there was some force at work in the markets that I didn't understand. If my scenario was that U.S. equities were immediately going to zoom higher and that any break up through certain levels would scare shorts and add to the gains, I'd likely also have pinpointed a lower level that would tell me that my scenario was wrong.
That April day, however, I'd noted the indecision in global markets and the jittery way our futures reacted to news. I knew from many years of watching U.S. equities on FOMC decision day that U.S. equities sometimes tended to "triangle up" going into an FOMC decision, not breaking out of that triangle until after the FOMC decision or maybe even the next morning. The other pattern often seen was prices zooming just underneath strong resistance or just above strong support, then parking there and waiting to likely break through after the decision if the decision was as hoped or feared.
That's the background. Since I trade options in the equity indices, usually the RUT, I usually go to the RUT's chart at this point to build my scenario. The RUT's daily chart wasn't much help because the RUT's daily candle the previous day had been a small-bodied inside-day candle, with the candle's entire range inside the body of the previous day's candle. That's indecision personified. Taken together with the previous days' candles, it looked as if it could be the type of bullish reversal signal illustrated below, but the point was that we had to await confirmation before we knew.
Image of a Bullish Harami from Investopedia:
April 29's candle on the RUT's daily chart had completed this three-candle formation. My scenario then, had to include the possibility that the RUT might reverse higher, at least over the short term. Of course, no candlestick formation can be completely trusted in the days of high-frequency traders. I'm just saying that I would have then begun looking for signs to include in my scenario that the RUT was breaking higher and also signs that this formation was being invalidated. Certainly prices dropping below the April 28 low would have been a sign that this formation was being invalidated, for example.
/TF Intraday Chart as of the close 4/29:
Remembering the indecision the day before in the RUT and in the global markets overnight and keeping in mind the sometimes-propensity for equities to "triangle" up a day or two before the FOMC meeting, I drew a top trendline across the last two day's highs, to determine the point at which I would decide that prices were breaking higher. (Note: I more frequently use the RUT's intraday chart rather than the RUT futures but had already annotated it for my own trading day and wanted different annotations for this article.) I also looked at the possibility that the /TF (and RUT, on its own intraday chart) was forming an inverse head-and-shoulder, and that it might triangle up by dropping down into a second shoulder with a lower higher than the 4/28 low, doing that sometime before the FOMC decision. For the time being, I would use sustained prices below that 4/28 low as my decision-maker that this preliminary scenario--the formation of a triangle before the FOMC decision, and a likely break to the upside after it--was being invalidated. If the /TF (and RUT) did drop into a second shoulder and rise again before the FOMC decision, I would draw the lower boundary for a triangle formation and then use that lower trendline as the sign that the preliminary scenario was being invalidated.
I trade neutral strategies now, so what difference did this scenario make to me? Why did I need to think about it?
I still need to hedge my trade, and I do sometimes have to make decisions based on my ultimate scenario. For example, what if my optimal range for the overall delta in a particular month is -50 to +50 deltas for a 10-contract position, and my typical end-of-day adjustment period has arrived on that April day, and the position is at +48 deltas? Since it's so close to my adjustment level, should I maybe sell some deltas by selling one of my call debit spreads even though the +50 level wasn't reached? Maybe I would if the RUT had broken below the bottom trendline of a triangle or certainly if the RUT had been ending the day below the 4/28 low. That short-term bullish harami formation would have been invalidated. I might want to be conservative and not be quite so close to my adjustment level, bringing the trade into a more neutral stance in that case. In fact, if the RUT had barreled lower than the 4/28 low at any point in the day, I might have wanted to be a little proactive in neutralizing deltas since bulls would then be seeing a potentially bullish formation be rejected. They might bail en masse.
If the RUT had broken above the top trendline and the position delta were -48 deltas as my end-of-day adjustment period approached and particularly if it were above the 4/29 peak high, I also might want to be a little proactive. I might want to buy more deltas.
In my case, as the time for the FOMC decision approached, the RUT had indeed triangled up. I knew that I didn't yet have the information to know which way the RUT would head after the decision because the triangle indicated indecision on the part of market participants. I had seen the potentially bullish harami pattern indicating the possibility of a short-term bullish reversal at least, but that formation needed confirmation.
After that decision, the RUT broke higher out of that triangle's top trendline. I did decide to be a little proactive and neutralize deltas when the upside breakout occurred, a little ahead of my usual end-of-day adjustment period. That decision saved me about $70 from the price I would have paid for the needed long deltas if I had waited until the very end of the day.
This sounds like an involved process, but it isn't. It takes me far longer to describe the process I go through than the five to ten minutes it takes me to run through the performance of global markets overnight, the upcoming economic releases in the U.S., and any particularly important chart developments on daily and intraday charts.
When I still traded more directionally, out-of-town appointments sometimes took me away from the markets, just as some of you must be away from the markets for much of your work day. That happens now, too, of course. In those cases, I decide on my decision points ahead of time, often the previous night, set contingent orders for what I want done if my scenario plays out or if some benchmark was breached and it was clear that the scenario was wrong. I also set alerts to trigger a point or a few points before the order is triggered. I still use those types of orders and alert combinations for my more neutral trades when I can't watch them. In the notes accompanying that alert, I always include the telephone number of the trading desk at my brokerage, the type of order I've got set and why, and an instruction to myself to work it manually if I can. Sometimes I can: sometimes I can't. Sometimes an alert will trigger when you're at your lunch break--especially since a lot of game-changing action tends to occur at about 12:45 CT--and sometimes it will occur when you're on a conference call and can't break away. This is still a useful way to prepare for your trading day.