The most important indicator is not on your charts

This week I had some really interesting live trading sessions with a couple of seasoned pros in two utterly unrelated markets. Both traders relied on one data point that most newbies don’t even think about.

Thursday night I hosted the Trading Battle with Peter Foster who focuses mainly on the energy complex. We got to talking about his most recent trade in oil and after we went through the usual price structure on the chart he casually mentioned that what really prompted him to pull the trigger was the fact that oil was approaching the close of the day and if he was right on his analysis the trapped shorts would be forced to cover providing fuel to his long.

Less than 12 hours later K and I hosted our  Open House live trading session and as K was discussing her recent swing win in EURCHF she also mentioned the time of day noting that she only put the trade on at the start of the New York session when fresh liquidity could move what was already a very strong fundamental and technical setup in her direction.

Both Peter and Kathy are seasoned traders. Peter has been trading energies since 2006. Kathy has been trading FX before she was even allowed to legally drink in the state of New York. Time of day is second nature to them because they have been watching their respective markets for years. Like an FBI agent who tracks his suspect for months learning all of the daily habits down to how they take their coffee every morning, professional traders track their markets in much the same manner.   And each market  has a very distinctive pattern that repeats itself constantly day in and day out.

In equities, for example where I spend all of my time, the first hour of NY cash open is almost always ripe for some mean reversion because dealers who have absorbed the initial flow of capital from the opening retail orders are keen to square up and flip out of their inventory.  So if retail is selling at the start of day we always get some sort of  a bounce before noon and vice versa. 

The last hour of the day however, can be a one way train and woe is to the trader who decides to take on the market at that time. The last hour of the day in equities is dominated by institutional flow that needs to settle up - price be damned. If markets panic, the last hour can look like one uninterrupted red candle as everyone tries to lock in a mark before the close.

These things are obvious and almost subconscious to anyone who has traded for a while and yet are almost never really discussed by “gurus” armed with colorful indicators and beautifully annotated charts. Newbie Newsflash - an RSI of 30 at 11am is not the same as RSI at 30 at 3pm NY. 

This is also the reason by the way why all algos fail in the end. Algos are incapable of discerning context and context is the single most important factor that determines profit or loss. Time of day is just the most common example of context - yet this indicator does not appear on any charting package although it is by far the best way to tell if other indicators are providing an accurate reading of the market or not.

The other day I was listening to a podcast on which a guest noted that our job as traders is not to know why but to determine where. I couldn’t agree more, but I would just add that in trying to accurately determine where it is just as important to focus on when.