“Are you really able to follow the numbers in the ES or NQ or even treasuries? I don’t understand how that’s possible.”
This is a question I’ve received many times over the years. I’d like to clarify a few points with regards to making decisions which are based on watching the order flow and price action.
It is indeed possible to follow the numbers in the treasury products at times because they are usually very liquid and move slower than most markets. This is the main reason I consider them to be some of the best futures products to trade, particularly for new traders attempting to learn how markets work. One can learn to fine tune entries and exits in a way that’s not really possible in most other futures markets. But even if a person can follow the numbers, the changes in the numbers have to be viewed within the context of the price action.
Examples:
Iceberg orders may be relevant or may not be relevant depending on the situation. A common comment I receive is:
“Sometimes I see an iceberg and the market turns. Sometimes I see the market move right through an iceberg without stopping. And sometimes the market just chops around in the area of the iceberg. How am I supposed to know ahead of time which of the three it’s going to be?”
The answer:
You have to look at the bigger picture.
If the 30-year, 10-year and 5-year are all dropping like rocks and you see one iceberg at one price, that’s not a reason to step in front of a train and go long. You will most likely get run over in a matter of seconds as the sell-off continues.
If a trend is slowing and it seems as though a move is running out of steam, then an iceberg might be a clue to a reversal.
If the market has traded in a 12 tick range for two hours and an iceberg suddenly trades in the middle of the range, it’s typically irrelevant.
Context and price action play more of a role in the decision making process than the constant changes in bid/ask numbers or the number of contracts trading.
Yesterday there were two times during the morning when I thought the ES was going to snap lows. It didn’t go either time. I was on the short side both times but didn’t lose money. Here is why that was the case:
Each time it approached the low, instead of quick snap through the low, it just stopped, paused, traded a few contracts, paused, moved slightly higher and paused. This is not what I want to see when I’m short. I know this from experience. It’s not about the changes in bid/ask or contracts trading or market profile. It’s about knowing market behavior. It shouldn’t have paused that long if it was going to break lower. In that situation, I exit the short and prepare to reverse and go long if the bounce happens and it rockets higher. I’m reacting to the action. I’m not convincing myself that I know the market is heading lower or I know it’s going to bounce higher. I just know that if it was going to break lower with any momentum, it probably should have already gone. Since it didn’t, I exit. There’s no reason to wait and take the chance of being run over if a fast reversal happens.
You have to let the trade present itself to you. If you have an idea of how this game works, the trade will appear. When it does, you react. But you have to wait for it.
Most people turn on their screens and if they haven’t taken a trade in the first five minutes, they start losing their minds. The desire to do something is stronger than the desire for profit. Profit requires patience.
So a person takes five trades in the first hour even though he has no real read and digs a hole. When the good trades present themselves in hour two, the person will often not take them because he’s already disgusted with his performance during the first hour but even if he does take them, all that happens is he digs out of the hole and breaks even rather than making a profit for the day. Sometimes the best trades do present themselves very early and when they do, that’s when it’s time to be involved but if they’re not there, don’t talk yourself into believing you are seeing something you’re not. The best trades are the extremely obvious trades.
No one is following every transaction in the NQ with the naked eye. It’s clearly not possible. But I can get a feel for the ebb and flow of it by watching the DOM and use that information to make trades in stocks and ETFs which track the Nasdaq 100 index. With treasuries, I am actually watching many of the number changes because they aren’t as fast. But in either case, the current price action is the most important factor in the equation.