A bit of a different blog entry today (the video is uploading as I type)

How can reviewing prior market data help with your trading?

I crunch numbers on the YM regularly. I want to know several things:

1) What is the most likely 1st 15 minute range

2) What is the most likely 1st 15 minute volume

3) What is the most likely daily range

4) What is the most likely overnight range

5) What is the most likely 1st hour range

Armed with this information I can do several things. Firstly I can see in the 1st 15minutes if the day is “usual”, secondly if I can read the early market direction, I have a natural target for the trade.

Using the overnight range information I can compare the current days overnight range with the data to potentially gives me a heads up that market participants are more or less involved. A larger than usual overnight range may suggest a larger number traders reacting to news before the open. Again this is information I can use before the open to give me some sort of hint as to the type of day we may have.

Finally, armed with the daily range data if the day so far has not exhibited any unusual trade characteristics I can assume the day type to be “normal”. So if I were to get a counter trend trade setup as the market approaches the upper end of the “normal” daily range I have more conviction to take the trade and potentially hold for larger targets.

So you can see how understanding what is “usual” or “normal” for the market throughout various points in the day can allow you to select trades from your strategy library to suit.

An unusually large volume first hour could lead to the usual range being breached and so continuation trades may be the flavour of the day. A relatively low overnight range with a small opening gap could indicate a range bound day and so counter trend trades at extremes may be prudent. Or at the very least avoiding breakouts unless the day type changes.

Trading successfully is all about market context, understanding what phase your market is currently in is absolutely crucial to trade strategy selection.

Here’s some of the data for the YM:

Data used is 2 years worth.

For comparison I ran the numbers for the 1st 15minutes just from 1st May 2011. As that was the swing high and the market behavior has changed I wanted to compare to 2 year data.