Trading Hypotheses And Trading Ideas

As I'm writing this, it's 6:39 AM on a Sunday morning. I've just finished an hour of market analysis and prep for the week. Just a little example of the difference between dreaming about success versus waking up and prepping for success. Recently I asked a trader to send me a review of his trading. He explained that he was busy with personal things and would get that to me in a few days. Right.I'm still waiting for the review. If you were to talk with this trader, he would sound convincing about his "passion" for trading. Too bad he doesn't have a passion for working on his trading.

OK, off the soap box. Above is an interesting chart of the ES futures, covering roughly the past month of trading. One unique aspect of the chart is that each bar represents 300,000 contracts traded. Below the chart, the green and red bars show whether buyers or sellers were dominant during that 300,000 contract period; e.g., whether more transactions were occurring at the current market offer vs. bid price. The bottom oscillator captures a moving average of the volume at offer/bid data.

Ask any market participant about the stock index futures and they'll tell you that we're in a bull market of historic proportions. And they wouldn't be wrong. We've seen quite an upward trend recently. Still, market cycles can occur within the context of market trends; few trends move higher with no corrections whatsoever.

A worthwhile heuristic I use in framing trading hypotheses is that the number of volume bars representing selling is roughly proportional to the number of bars of subsequent buying

Another way of saying this is that the volume "trapped" by fading a trend is proportional to the amount of volume that ultimately has to cover their positions. What is important in this is that we're framing a hypothesis, not jumping to a conclusion.  Before we can have a trading idea--and any "conviction" in that idea--we have to entertain a worthwhile hypothesis. Worthwhile hypotheses come from looking at fresh market data or the usual data in fresh ways. 

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