The Three Most Important Tools:  Information, Information, Information

By: Keith Cotterill

The following is an excerpt from Keith Cotterill’s Don’t Tell the Professionals

“If you are not fully informed about the Current sentiments of the professional money, then you may as well be trading in the dark.”

‘It’s the early bird that catches the worm” is a saying more relevant to the Futures markets than any other business I know.  Every day in the commodity exchanges, well before trading begins, floor traders occupy the top steps of the pit, gaining a bird’s eye view of the other traders.  More importantly they are in direct eye contact with the phone clerks who are their only link to the outside professional money.  So powerful are these top traders that they dominate the rest of the crowd, with the other traders scrutinizing their every trade.

A good example of one of these powerful professionals is top bond trader – Tom Baldwin.  Indeed Tom’s market operations were so big in the 1980s that many believed he had become a dominant force in pricing US Treasury Bonds, something rare for an independent trader.

One morning in 1984, Tom Baldwin’s dominance was to be tested, as a newcomer challenged him for his spot on the floor.  Yet instead of rolling up his sleeves and getting into a confrontation, Tom simply moved to a new spot…and so did every other trader in the pit. 

The newcomer was left stranded.

Like the rest of these traders in the bond pit, if you want to make money in the markets, you move with those whose opinions really matter.  So to achieve any level of success in the markets, your trading strategy must be as well informed as any professionals’. From the outset you must know what it is you are up against and develop effective, risk-averse decisions that place the odds in your favor.  More than that you must seek out what the professionals are doing in the markets – where their true sentiments lie.  And having price data and volume figures is about as close to having an “inside” view of the market as we could wish.

It is a self-evident fact that it takes professional money to move and change the trend in any market – so huge is the amount of money they are dealing with.  Although no one individual trader is powerful enough to move the markets in the long term, it is recognized that certain traders can move them in the short-term.  This type of short-term movement is known as “ramping.”  Without participation of the other dominant traders such a move will remain short-lived.  Therefore, in order to achieve and sustain a longer-term move, other traders will have to jump in and support the move. 

Therefore, we must first understand the tactics used by the professional traders when they are “lubricating” the moves.  Once we understand their tactics we are ready to begin trading with them in the market.

HOW TO SPOT AND INTERPRET PROFESSIONAL ACTIVITY

Using price charts, with total contract volume, allows you to develop the ability to interpret professional activity on a daily basis.  As each day’s prices arrive they will be slotted into an already unfolding story.

This is the same as the card counter in black jack.  By observing very closely the cards that come out of the deck, a good counter can gauge how the remaining cards fit into the unfolding game.  That is, whether the remaining deck is rich in tens or aces.  Card counting allows the professional player to bet according to how favorable or unfavorable the deck may be.  By doing this, the player has a predetermined probability of risk/reward worked out in advance.

This is the same in the markets, but instead of counting cards you use total contract volume and price action to determine how favorable the market is, and whether or not you should establish a position.

Now we know where we should be focusing our attention in the market.  We know that by using price charts in conjunction with total contract volume we can give ourselves a window directly onto where the professionals are moving.