06 Oct Market Rotations – Vertical and Horizontal
I have received several emails by traders who are confused by what I mean when I say that the ES is “rotational” or “expect a rotational trade”. This is a complex subject, but readers must understand the market as an auction.
Generally, most traders will read everything they can get their hands on when they are learning to trade. They think: The more I learn, the better I will be. This is something we pick up from years of education and work-related training. Unfortunately, this isn’t the case in trading. Trading is about picking a couple of things to focus on and then getting really good at using them. This is also the case with what I’m discussing here. In order to understand this, you must understand the auction process and how markets go about discovering what the “fair” prices are in any given day or month.
Remember this: The market moves from horizontal development to vertical development to horizontal development and so on. It is a price-discovery machine. The market will rotate within a range of prices until a variable changes (variables change all the time including interest rates, time to expiration, news, earnings, economic news, geopolitical news and threats that may cause investor fear or greed).
Here is an example of a recent chart that is broken down to demonstrate this on a 5 min ES Dec 09 Chart:
How do I know that the trade is going to be or is becoming rotational?
Let’s examine this day and assume that all we have is the very open of the day and we don’t know anything else (5 min ES Dec 09):
Now, let’s see what happened with this rotational prediction (and I did this during market hours over twitter):
Now check out what happened due to the 3-day rotation and drop in VPOC:
While we are looking at these rotations and following the market’s progress, let’s see what happens next:
Do you see how this analysis – which is done while the market is trading and is based on VPOC’s, the open, the range and a couple of other factors – let’s us see how the market is rotating and what to expect?
Now try to glean the same information from this chart:
It is hard to describe or explain this topic without showing tons of examples. It is late and I need to hit the send button, so maybe this is just food for thought. Maybe, for some of you, this answers a lot of questions. Most likely though, judging by the email flowing to this account, it will generate many more. 🙂