Understanding Market Structure

Understanding the market structure of the day impacts all of your intraday trades. Corey Rosenbloom has done some excellent work on this important trading concept. Dr. Steenbarger has written about its importance. At SMB we talk about the Big Picture before we start our AM meeting.

Below is a self-proclaimed rant from a new trainee. We can learn from his monthly analysis of his underperformance about the important of identifying market structure.

Observing from my own poor performances in November, I’ve studied the days that I’m down and the day’s I’m up – the reasons behind it and my thinking process behind those days.

I’ve realized that knowing A/B/C setups, identifying risk/reward, try to focus on psychology is important, but without this key component, I would never become a successful trader. This is the understanding of the current market structure.

Everyone knows the crisis in Europe and how it became an inescapable headline risk that every trader must deal with across from the Equities/Options market to the Debt and the Derivatives market.

Everyday when I come in, I would outline my best morning idea and when market opens try to focus on that idea and find my best setup in that idea. However the problem becomes… why should that setup work today? If this setup doesn’t work, what’s your plan B? Are you going to wait patiently for that setup or become ichy to start making setups on the way trying to trade P&L? It’s these intertwining questions that pop up in my mind during the open. Keep it simple. Know all the what ifs for this stock that has potential for this day, and play them accordingly to plan outlined during morning research. Do not play the guess game and think on the fly game. It does not work and it’s simply too much to handle for anyone’s mind because emotions will start to factor in and result in a poor trading decision.

Plan. Plan plan.

I have to work on all the possible scenarios before market opens to avoid any guess work. Like carlton said, write them down and only do that on the plan sheet. Otherwise, don’t trade. Unless the setup make sense and it also make sense for the market structure of that particular day.

There are A setups in breakouts, range, consolidation and fading days. But none of these things will work if you falsely identify the type of market the day’s in. And I have fall into prey too many times thinking ok, if I have a good setup, good risk reward, it is going to work more times than not. False. It will only start to work only and only if it make sense for this particular day when I identify the right market structure.


One Good Trade

One Comment on “Understanding Market Structure”

  1. I would argue that a lot of this issue could be temp-fixed with stock selection. You can make money trading certain setups while being semi-clueless about market structure, if you’re in the right stock. Would they be traded as optimally or would you have as many opportunities, compared to if you did understand market structure? No. But they’ll work without the “only and only if” statement. I’ll just trade stocks with fresh news or lower vol stocks that aren’t indexed to the major ETF’s.

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