Futures trading has remained my side hustle for years, and I continue to be it’s devout student. Little did I know while learning the art and science of trading that besides understanding the financial market, those lessons will also help me shape my thinking and actions.
Read time: about 2 min.
First thing first. For those not familiar with Futures trading, here a quick definition. Futures are financial derivative contracts where buyers and sellers agree to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
There are countless methods and systems that traders use to win from the market. And regardless of their types, whether they are scalpers, swing traders or long term investors, almost all of them use a few essential tools as part of their trading battlestations.
Today we’ll discuss the most critical and fundamental tool that influenced me the most – Charts.
Chart are used to visualize the price action or movement of price in the market. Candle charts are the most common. Some use 1 or 5 min chart, some 10, 60, and so on. Each time frame represents the price movement within the given time interval. For instance, if the price moved from $200 to $208 in 5 minutes, and unless the market was trending (which is not very often), the price most likely moved up and down several ticks, depending on the volatility before reaching $208.
Exhibit A: 1 Min Chart
With a smaller time frame chart, the price movement appears as chaos. It provides the trader with the dominant force in the market in that short time frame, but not the overall picture. It’s hard to understand where the market is heading, preventing better decision making. And when real money is at stake, it is hard not to get pulled in the noise. You then become the noise.
Uninformed traders make decisions based on the price movement in the small time frame, where the vast majority of them usually get slaughtered in the choppy price block. Well informed traders on the other hand, make use of the larger time frame to get a feel for the market as to who has the upper hand, the bulls or the bears, and then apply that intel on deciding on the trade in the smaller time frame.
As you can see in Exhibit B and C, the noise in the price movement gets removed as we zoom out. With less noise or chaos, it gets easier to make informed decisions vs getting caught up in the noise whirlwind.
Exhibit B: 60 Min Chart
Exhibit C: Daily Chart
That’s common sense, you would say. Why would any trader react or make decisions with very little information? Precisely. But don’t we all find ourselves doing the same in our lives?
In life, when we see the world through the lenses of news, social feeds, of unproductive office conversations, our experience can appear to be very noisy and chaotic. However, the reality is, that is not the case always. Our mental filters get skewed and impress our brain to believe the momentary noise as facts of life. We tend to make that our reality because it’s the closest to our rationalization. Stock market rallies one day and nose dives another based on twitter or some unrelated news that has nothing to do with reality. We, believe it or not, often prefer to be the victim relinquishing all the blame to others – the market, the government, the politicians, the company, the system, the boss, the neighbour or your partner even.
It is also true for the unfair opinion we form about others based on little information. We ignore or chose not to use the larger time frame of context to get a better understanding of others, which leads to conflict, broken relationships and disharmony.
Smart money or market movers use longer-term views for decision making, and we should too. Take control of the chart you use for trading your sanity or managing your priorities. The larger the time frame or broader the perspective we use to view the current events or situations in life, the easier it will appear to control them.
But are you not hiding from reality or burying your head in the sand by walking away from reality?
Yes, you should be aware of what’s happening around you, so you can make decisions accordingly. However, the vast majority of us do not pause and think about the external factors as they are – one of the factors. There are several other factors at play that we tend to ignore because – you guessed it right, we get sucked up in the noise.
By being in the problem, you become the problem, and no solution will come regurgitating the problem. You need to step outside and see it from a solutions vantage point.
Don’t make decisions based on a smaller point of view. Have the courage to understand the noise and walk away from it.
Thank you for sharing some of your precious time with me each week.
Until next week.