Thursday, 22 September 2011

Outside In Trades

We haven't discussed Outside In trades much in the blog. That was by design, as most new traders try to become knife catchers- a very risky business unless done with a tested plan.

As an ex-local, Outside In trades come more naturally to me, as that is what we did on the floor. When the rubber band was tight enough, we provided liquidity at a price.

Doing the same thing as a retail trader is more complex due to the invisibility of the pit - brokers and other locals - and the fact that it costs more to trade from upstairs than it does in the pit.

That being said, Outside In trades are a good weapon in my arsenal. I've referred to those trades in the context of doubling down. The theory is that if the market was overbought or oversold where I put the trade on initially then by averaging I'm getting both a better price and trade location. The governing factor is to know where price has to go for me to be wrong and that the amount of loss that would create is compatible with my trading plan. Back testing these types of trades is of course part of the process. I know what I can expect when I'm trying to catch the knife and I know what I am leaning against.

Notice the volume information not only in the footprints, but the volume breakdown and the Volume profile on the right. The high and low volume is what stops the market as it's either activity that caused the move stopping or opposite activity coming in that stops the move. These supply good exit info.Of course I also have an algo that trades these pictures.

In the mean time, economic and market transition is continuing. The U.S. and China are the main managers of economic transition and we, the traders, are the managers of our own market transition as the pits disappear and the algos take over.

These electronic algo driven markets feed on themselves and learning to cope with this self cannibalistic activity will be the difference between survival in the markets or going the way of the dinosaurs.

Afternoon delight:


  1. Excellent post Tom, I'd have a couple of questions.

    Why did you use a three points charts, were you expecting a narrow range day after yesterday?

    After the last trade in the picture where you took a loss, did you consider going long on such a day?

    Btw, I am using IQFeed and I see a lot of differences in the data. I suppose this is the IB Feed.

  2. Jared, I was expecting a very volatile day and wanted to catch the outside in trades so I dropped down to the 3r. I had a couple of quick scalps long but only for a few seconds. This is definitely a down day. All the feeds are different and the same feed is different from different locations so its a matter of trading the feed you have. I run four different feeds and they are all different.