3 minute read.
Part 7 excerpted from lesson 10.3 of the upcoming Trade Like a Pro ver.10 course.
I still remember the day I learned about the importance of binary questions. I sat in the training session with eleven other traders who made the cut to manage a large futures account for a Prince of the Kuwaiti Royal Family. We were about to increase our account sizes ten-fold and the head trader wanted to make sure we continued our successful track record.
A binary question has only two possible answers: A or B. Professionals ask binary questions to clarify what is occurring in the market. This high level inquiry sets aside the details and considers the big picture. By asking these questions Professionals identify not only what is happening in the market, but more importantly what is not happening. It is just as important to confirm when something is wrong as when it is right. Binary questions give the Professional a simple tool to cut through the fog of uncertainty.
The head trader of the futures account for the Royal Family asked, “What are the simple questions you ask throughout the trading session that you don’t know you’re asking?” We all looked dumbfounded. He asked again, “What are the simple questions you ask, all day long, that you are not conscious of asking?” His clarification did little to help. So, he turned to white board and began to write:
- Is it red or is it green?
- Is it strong or is it weak?
- Is it tight or is it broad?
He filled the white board with questions then said, “These are the questions you are asking as you invest and trade. Never forget them. I never have.”
Simple Questions to Confirm or Deny
Binary Questions asked in the moment rely on current information, not some lagging indicator or historical data, but real time. The questions increase the Professional’s precision in decision making. Asking these questions about whatever time frame you trade can be quite revealing.
Trending or Trading Range?
The first and most important question: Is the market searching for value, or consolidating around an area of perceived value?
The market is constantly aligning itself with value. The pricing structure the market is designed to examine, analyze, and price items as close as possible to perceived value. The market is efficient at this endeavour. But value is ever changing. Innovation, individual needs, fashion, and geo-political events increase or decrease the underlying value. Professionals know the importance of determining whether the market is searching or consolidating around value.
Up or Down?
If the market is searching for value a trend will form in the direction of the search. A bullish trend is a search for higher value and a bearish trend is a search for lower value. The search will continue until both sides (bulls and bears) agree on a level of value. Then a Trading Range will be formed.
The search for value has changed since the introduction of computers. The search happens quickly, often in a value shift, rather than a channel. Professionals understand the opportunities and risks that value shifts create.
Strong or Weak?
This is often the most overlooked question, though it is vital to understanding the strength of the market. We discussed this in an earlier post. Strength or weakness is an indication of one side’s commitment versus the other’s. No one wants to step in front of a freight train. The weaker side will step aside and let the market run and re-enter higher or lower. Professionals know extreme moves can be quite profitable or create disastrous losses.
Buying or Selling Pressure?
The institutional bulls and bears defend their average entry price. Their willingness to protect that price increases and decreases the pressure of the market. The buying and selling pressure are necessary for reversals to occur or trends to continue. Professionals know that observing an increase in one or the other can be quite advantageous.
During the course we will discuss many other questions like: Tight or Broad? Support or Resistance? Are there wicks or tails? Is the Reason for This Trade still valid or invalid? By asking these questions we identify not only what IS happening, but also what IS NOT happening.
The Importance of Targets for Professionals
Coming in September
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