Letter from Joe Ross

Dear Traders,

It has been quite a while since I wrote one of these letters to all who are on our list. It is being emailed to you, and will also be posted on my blog.

I’ve been trading, but am also involved in erecting affordable housing in Uruguay. I haven’t had a lot of time to write, other than keeping up with the regular free weekly Chart Scan teaching letter.

I’ve had some things on my mind that I have wanted to share, and which I hope will be of benefit to you.

There are actions that happen in the markets that used to be quite clear to anyone who cared to look, and these actions still affect trading. However, these days they are practically invisible because of the almost total disappearance of the trading floor. One of these actions involves the way the market makers tend to trade. These actions are from habits formed long ago when almost all trading was carried out on the floor of the exchanges.

When trading was done on the floor of the exchange, the big locals trading their own accounts were generally off the floor by the time 40 minutes had transpired since the open. The drop in volume and participation was noticeable. For example, at the open the S&P 500 pit in the futures market was so crowded that it was impossible to see the other side of the pit. However, within 20 to 40 minutes, it was possible to see the other side. Where did all the locals go? Generally, they went up to their offices and stayed there until the close. Even at the close, they would remain in their offices unless something major was happening that required them to come back down to the trading floor. To a greater or lesser extent, this is true of all markets. In general, the only traders who remained on the trading floor were those who had to be there. These were clerks and floor brokers. The clerks represented brokerage, private trading firms, or locals. Floor brokers represented brokerages that didn’t have their own clerks down on the trading floor. Out of pure habit, locals are still out of the market within 20 to 40 minutes. It is these locals, many of whom are market makers, who create much of the momentum around the open, and it is the market makers who are eager to fill orders around the open. The actions of the market makers filling orders (making a market), causes the volume to be high early in the trading day.

Are you aware that the volume around the open is quite different from the volume surrounding the close?

The job of the market is to fill orders. That is why a market exists! Around the open, much of the trading action is caused by market movers seeing to it that orders are filled. Of course, there are traders making a market throughout the day, but the principal market makers, the ones who feel it is their duty to make a market, are the ones eager to make their money by filling orders, and then getting out to enjoy the rest of the day. The main purpose of movement around the open is order filling.

What about the action around the close? What is the main purpose of movement at that time? Around the close, all traders who are day traders need to get out of the market; they need to “get flat.” Shorts need to buy back their short positions, and longs need to sell their long positions. The purpose at that time is getting flat. Although a lot of orders will be filled, filling them is not the primary purpose of the price action. At Trading Educators, we show you how we trade around the open. The reason is that we want to follow the price action that is primarily involved with order filling, not the action involved with getting flat. You see, we don’t want to sit and watch a screen all day. We want to get our trading done, and enjoy the rest of the day, as do the locals and the principal market makers.

Next time, I will write about volume as it relates to the discussion about the trading around the open and close.

There is something else I’d like you to know about. On June 25, I will be holding a live webinar with limited spaces. What I will cover in that webinar will be the best way to trade I’ve ever experienced. I don’t know why it took me 50 years to figure it out, and it is probably not for everyone. It involves trading stocks, not futures. However, I’ve been trading and developing the idea since I first came across it in 2001. Along with a small group who are trading the idea, we have not sustained a loss in two years.

I want everyone to know what we are doing so, if you are not able to join us for the live webinar, we will record it, and it will be available as a recording. I promise you it will be packed with information.

As always, I wish you the best.

JR