Wednesday Notes – Fading the Status Quo

Here’s an early post for those awaiting this afternoon’s FOMC announcement.

There’s an old campfire game that many of us have played.

It’s the one where a story gets passed from one person to another, and by the time it gets back to the initial person, it hardly resembles its source.

So I’m going to start today’s post by clearing up a few misconceptions on my views on “feel”.

Now recently, we’ve discussed the importance of a trader’s development of “sense” and “judgement” for those who choose to forego programmed black boxes and trade in a discretionary manner.  Yet since we’ve pretty much beat that topic to death over the past few years, I’ll leave that one alone and let you forage through the 800+ pages of the blog.

Yet there is one obvious and incredibly important component to my personal definition of the word “feel” which some are missing, and that’s the “feel” of the market which one is trading.

For ES, like any other trading instrument, has a … well, we can use several terms such as “rhythm” or “pace”, but I’ll go with “feel” since it’s been thrown out there.

As locals know (both the early day floor traders and current-day remote electronic ones), one of the benefits of trading a single instrument (vs. multiple instruments with similar patterns) is you get to know your trading instrument like a musician knows his/her instrument. 

Or like a parent gets to know its child.

For over time, one develops, yes – a FEEL – for the heartbeat of ES.

For on-site traders, it may be the feel of the action and sounds around them.  Which is of course why many former floor traders initially struggle when shifting to off-the floor trading.

Yet as an off-the-floor trader, I view the feel of the ES contract incredibly important.

Which of course takes – here comes our favorite word again – time (which btw is the reason I DON’T do “cram them in” single-day seminars and will ONLY instruct if asked over a long period time … for it takes time to get to know your “child”).

Examples of your “child’s” personality?

Well for ES, I’d start with the following:

How does it normally respond to the Europe morning session? 
Does it lead or lag and to what extent?
How does it normally react to Economic data releases?
Does it matter whether it’s the Jobs report or Consumer Confidence?
What about FOMC?  The morning prior to the release?  After its initial release?
How liquid is it during the Globex session?  U.S. Morning Session?
Midday?  U.S. Evening Session?
How relevant are the posted DOM bids and offers? 
Does it differ based on time of day?
What about its relationship to VIX?  TICK?
How sensitive is ES price to moves in either?
Does it have a tendency to take out stops before reversing, and if so, how quickly?

I could go on and on, but hopefully you get the pic.

Yes, trading is all about “feeling” … in THIS manner.

Anything less is trying to dance without music.

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The other topic I want to address is the topic of “fading” markets.

For if I had a nickel for every time someone asked me, “Do you “fade” markets, and if so, isn’t that dangerous?”, well … as they say, I’d have a pile of nickels.

I “love” this question because it has one simple answer. 

Every trade ever placed by every speculative trader in the history of trading is essentially a “fade”.

A “fade” of the immediate status quo of price with an expectation of a different price in the future.

I’ll even go a step farther and say that anything worthwhile ever accomplished in life, was a “fade” of the status quo.

Christopher Columbus faded the world’s notion that the earth was flat.

Thomas Edison faded the notion of reading by candlelight.

You bet I “fade” markets.

In every trade any trader ever has or ever will.

Is it dangerous?

I’ll let Annie Duke respond, who will remind us that it’s not the outcome of any specific hand (due to variance) that’s relevant  … or perceived to be “dangerous” … but rather the outcome of the entire range of hands ever played.

Then again, maybe Christoper Columbus simply had a pretty darn good “feeling”.