Keen observers of price behaviour have no doubt discovered that from time to time, gaps appear in the normal price sequencing. These can usually be seen clearest on a technical chart.

Gaps are areas on a chart where the price of a financial instrument has moved either up or down with no trading in between. As a result of this, the chart shows a "gap" in price. Gaps most often appear between the close of a market and the next session’s open. However, they can also – albeit less frequently - appear intra-day. Gaps can occur as a result of a variety of technical and fundamental reasons. For example, a gap on a Daily chart may be seen if a company announces strong earnings after the market close and its stock then gaps up on the open of the next day. An intra-day gap may appear when, for example, the bid/ask spread widens and market participants may need to pay up or down to enter or exit the market causing price to "jump" from the last traded price to the next that the trader can get filled at. This can often be seen around the release of key market news.

Some quick research on gaps shows that there are several different types of gap including breakaway gaps, exhaustion gaps and common gaps. Each one is said to signify a different outcome for price. Today we are focusing on gaps in the FX markets which are, more often than not, common gaps. In Foreign Exchange markets - which trade 24 hours a day, five days a week - you tend to see gaps occur most regularly on the Sunday open when New Zealand enters the markets first. In actual fact, gaps in Foreign Exchange are relatively common - over the last 18 months there has been a gap in the EUR/USD spot price approximately 65% of the time on the Sunday open. It is these daily gaps that we pay most attention to. One reason that gaps are of interest to traders is because of their tendency to fill. That is to say that price will often trade counter to the direction it gapped in and return to the price at which it last closed on the time frame you see the gap occur. In fact, again, over the last 18 months in the EUR/USD 98% of the gaps recorded have filled at some point. This statistic however, masks the fact that traders can suffer unsustainable draw downs when trying to execute gap-fill type trades on this basis.

However, armed with these statistics, we can get a clear idea that a gap is a “potential setup” that a trader can exploit for profit. One way that these gaps can be traded is by waiting for the market to open and then to see if there is any follow-through in the direction that the market gapped in. If the follow-through is insignificant, we can fade the gap - take a position against the direction the price gapped in - by entering at the first significant support or resistance level that the price reaches and hold the position until the price reaches the Sunday close and the gap technically "fills".
So, gaps are another example of price behaviour that the astute trader should be aware of. A gap can provide a frame of reference for the trader and those who aspire to be profitable will look at what happens after price creates one in order to spot potential patterns that they can profit from. By back testing the phenomenon, traders will likely be able to work out consistent, controlled ways to exploit these for profit.

Invest in Technical Analysis

Over the last year and a half, Inbox Education has focused upon many different elements of technical analysis. We have discussed Market Profile, support and resistance, the simple trend line and Eliott Wave amongst other techniques. All of these techniques allow you to interpret both the market price and the day structure, and to identify buying and selling opportunities. However, one advantage that our professional Proprietary Traders have when using the Market Depth is an ability to identify those buying and selling opportunities that are not manifested on any chart.
Many of the intra-day levels that provide profit opportunities for Futex’s traders are borne out of the interaction between market participants – buyers and sellers – at any one price, or over a series of prices. However, these interactions may only last for a few seconds and would register only as “noise” on a higher timeframe bar or candlestick chart. An example may be the repeated rapid-fire failure of a large participant(s) to breach a particular price. No matter how much is bought at the price in question, and no matter how big the individual clip (transaction), the price just will not break i.e. serious resistance has been formed. But if this activity takes place slap bang in the middle of a 5 minute range, the relevant candlestick or bar just will not highlight it.
Now, just because such “levels” are visible to intra-day Market Depth traders doesn’t mean that they can always trade them and profit accordingly. Of course you have to be in front of your screen to stand a chance but even so the Price Action can be lightning quick and sometimes too quick to exploit. But here’s the key… If you can observe and then commit to memory not only the price level in question but the precise price action that caused it, then whilst it may not pay dividends right there and then, there’s a strong chance that it will later in the trading session or maybe even tomorrow. For example, if the market trades away from this price level, establishes value elsewhere and then returns, the first retest of the same level tends to have a significant and potentially highly profitable reaction.
The most successful Proprietary Traders have an enviable ability to recall every last detail of the market(s) they trade, the trades that they execute – and there may be upwards of 100 each day for some – and the price levels that attract significant participant interaction. Armed with this information they are then able to execute highly effective, high probability trades that the majority of other participants that do not have the same market access and skill simply cannot. Proprietary Trading is a tough career to pursue and gaining an edge over the market wherever possible is vital. Investing in technical analysis that few other participants can see or are even aware of is just one way in which our traders are coached to establish their own edge.

It’s Elliott Wave Stupid!

This week we would like to set the record straight on a form of technical analysis some of you may have encountered known as Elliot Wave.  Although a very common tool used by technical analysts, Elliott Wave is unfortunately also commonly misused as many analysts fail to adhere to all of the rules set out by both its creator and it's most prominent experts.  (more...)

While bonds have been trending aggressively over the last few months in a Bear Market (yield), equities seem to be very directionless or sitting in a deer market. A deer market is a term used to illustrate a market condition when investors are unable or unwilling to move due to uncertainty - like a deer who freezes when "caught in the headlights" of a vehicle. (more...)

A common preoccupation, bordering on an obsession, for many novice traders is the ability to identify and profit from a technical breakout that leads to a trending market. I don’t blame them for seeking the answers to questions such as “how do I know when this market is going to break?” or “where do I enter and where should I place my stop?” It seems a logical subject for discussion to which there must be a solution; how else do you make money! Unfortunately for them this preoccupation is fuelled by the retail trading industry and the trading communities on the internet that promote freely available, fool-proof systems and free training with guaranteed results. The majority of these products are trend-following in nature and make for easy-to-draw technical charts, clear and unambiguous to all those that view them – after the event of course. How convenient it is to offer a product that once plugged-in will turn the global financial markets into an instant cash-generator for anybody with internet access. (more...)

A recurring question that has been asked by prospective traders wishing to join the Trading Floor Training programme during a flurry of interviews this week has been “which markets will I trade?” A sensible question for the eager, novice trader to pose and one which is asked with an expectation that the answer will be “a suite of products across a range of asset classes.” “Surely that is the glamorous world of financial markets that I will now inhabit as a Professional Trader” is the thought process of the interviewee! Futex traders and investors access multiple futures markets on a variety of global exchanges in addition to options and various cash markets. In fact, one of our business’ key strengths is the speed and ease with which our team of professional market participants can take advantage of opportunities in any product of any asset class. However, the ability to negotiate effectively a suite of products simultaneously is one which is honed over time; a difficult skill that requires tuition, experience and dedicated practice.

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As part of our regular look at Technical Analysis for Inbox Education we recently introduced the concept of Key Market Metrics (KMMs) (click here to see more information). KMMs are the objective, market-generated patterns of price activity that form the basis of a trading approach. The observation, recording, discussion and subsequent implementation of KMMs form a key component of the Trading Floor Training programme and a very effective technical analysis strategy. The May Trading Floor Training intake has just completed their analysis of KMMs and their findings provide some interesting insight.

Taking the Euro Stoxx 50 – a Blue-chip representation of 50 supersector leaders in the Eurozone and one of the most popular products amongst the Futex traders - as their focus product, our latest trainees have delved into the statistics and generated results that will go a long way to shaping their trading approach over the next 4 weeks. For example, the average trading range in the first hour (the Initial Balance) has tripled in size in May when compared to March. The average daily trading range has also tripled. The volatility that has permeated the financial markets over the past few weeks has manifested itself in the KMMs and trading styles should be amended as a result. It was also interesting to confirm that the outliers in terms of KMM data were as a direct result of significant fundamental drivers, for example the announcement of the European rescue package and the dramatic intraday sell-off, exacerbated by computerized trading, in the US equity markets.

And herein lays the key to the use of KMMS. By regularly analysing their chosen market objectively and in detail as part of their daily/weekly technical analysis routine, our novice traders are able to ensure an intelligent and thus effective trading approach. By studying metrics such as the smallest, largest and average size of an hourly or daily trading range and correlating the results to the day of week and the economic calendar, our trainees become skilled at interpreting in real-time the developing market conditions. They develop an ability to objectively assess whether the unfolding price activity is suggestive of a typical or an atypical trading day. This assessment guides the trading approach and assists in the rational identification and execution of higher probability and lower risk profit opportunities – a key goal for any professional Proprietary Trader.

Futex Investment & Trading Academy

“The Ultimate Futures Trading Education

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As regular readers will know, our professional traders use technical analysis to complement rather than define their understanding of the markets. Each market trades uniquely and none stand still. So although helping all students of our Trading Floor Training programme to develop their own style of trading is of paramount importance, experience shows that keeping technical analysis simple and unambiguous is key to achieving consistent profitability.

Enter the simple trend line.

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