What Traders Want; Confirmation to Buy or Sell.

By Lisa Erdmier, President, Chart-Ex LLC

Finish that last swig of coffee, turn on your computer and get ready to trade the mini-sized Dow, one of The Chicago Board of Trades fastest growing, liquid, and efficient contracts. The mini-sized Dow market, like all other markets, is made up of different traders making different trading decision that come together to form a uniform pricing structure. Every trader is different. Every trade is different. Few traders rely on only one piece of information to make a decision; they will use a number of tools, either calculated or gut instinct. Finding confirming data that will reduce the number of variables will enable a trader to make a more informative and confident trading decision. That is what traders want, confirmation to buy or sell.

Two dynamic trading tools that traders use are "Market numbers" and "Volume at price". Market numbers refer to pivot point, support and resistance numbers. The basic mathematical formula for the pivot point is derived from adding the high/low/close and dividing by 3. A vast majority of traders use this number to determine the market's direction. If the market trades above the pivot point, this is viewed as a "buy" signal. "Volume at price" refers to historical cumulative volume at each price. Cumulative volume at price shows the total volume that has traded at each price for different time frames, such as the day, week or month. Comparing the cumulative volume at price of different time frames confirms volume distribution. Traders gather market numbers before the opening bell, making it a future predicating data tool. Volume at price shows you the high/low volume areas, making it a historical data tool. Using historical data to gauge the reliability of future data is a common tool that has been used in many different forms for a number of years, because "History repeats itself."

 

Theoretical example of confirming market numbers with high volume numbers;

The mini-sized Dow's previous day's close was at 10,790, with today's pre-market opening call of 10,795-10,805. The pivot point for the day is 10,800 (in the middle of the pre-market opening call) and the weekly high volume area is 10,810. Your trading strategy for the day is to be on the long side once the market trades above the days pivot point of 10,800 and the weekly high volume area of 10,810.

The advantages of using the days pivot point with the weekly high volume area is that two trading tools merge together to give you a "buy" signal. Market numbers and historical volume at price numbers are different trading tools that have similar synergies; both show high volume areas that traders could use for entry/exit points. You are able to pinpoint the buying power at the pivot point area and the high volume area of 10,800-10,810.

mini-sized Dow real time example;

It is 7 a.m. CST Monday morning, July 12, 2004. The weekend is behind you and you are getting ready to start the workweek. You go through your checklist to get ready for the trading day.

1. Market numbers for the mini-sized Dow on July 12, 2004.

• 2nd RES  *10250
• 1st RES     10226
• PIVOT       10201
• 1st SUP     10177
• 2nd SUP    10152

2. Below is a mini-sized Dow Chart-Ex chart that shows and compares trading ranges with historical cumulative volume at each price. The left hand side of the charts shows the weeks trading range, which consist of the high/low/close for the last five trading days. The right hand side of the chart shows the previous day's trading range, which consists of the high/low/close. Cumulative volume is shown and compared at each price point for the week and day. The comparative format is achieved by having both trading ranges on one central vertical axis side by side.

CHART-EX MINI-SIZED DOW CHART

WEEKLY H/L/C DAILY H/L/C

3. By using the java applet on the Chart-Ex chart a trader can determine a support/resistance area by confirming the high volume area near the market numbers. Here you can easily see that at 10240 the weekly cumulative volume is proportionally high. Combining the 2^nd Resistance number of *10250 and the weekly high volume area of *10240 will confirm a resistance area for today's trade at 10250-10240. The cumulative high volume area reinforces the 2^nd resistance number because you can see that traders have been active at that price all week.

4. Trading begins...

5. As you can see from the standard bar chart for Monday, July 12, 2004 the high for the mini-sized Dow was 10245, right in the middle of the resistance area of 10250-10240.

The differences and similarities between traders and trades merge into one common goal: to make a profit.

In a perfect world, traders would be able to turn on their computers and have all the days' market data aligned that would show the high/ low for the trading day, or better yet the closing price. But in reality, traders use a plethora of trading tools to determine buy/ sell signals.  Confirmation of market numbers and volume at price will result in a well-defined trading strategy that merges past and future high volume areas.

 

 

About the Author

Lisa Erdmier is President of Chart-Ex, LLC. Chart-Ex is a web-based company that offers a new proprietary data visualization tool that displays comparative price action on a single central axis with cumulative volume at each price. The Chart-Ex display keys into the growing demand from traders and investors that want to see volume at price in one concise model.

The Chart-Ex displays above allows traders to “listen” to the market numbers. Click on www.chart-ex.com to use the FREE trading tool that uncovers the dynamics of the market's momentum by offering Market numbers and Volume at price.