Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

What is the Trading Context? How it helps you to take better trading decisions?

4 min read

we traders often immerse ourself into the Trading patterns , Price action and focus more on price based information (SGX Nifty, US Markets, ADR, GDR Prices) and price based indicators, Trend line breakouts and mostly miss the underlying market context which is the most critical information and has a great value in addition to our technical analysis.

What is a Trading Context?

The trading context is nothing but collecting meaningful insights about the underlying trend, market structure, volatility, momentum, ongoing trading sentiment, overall investors, and traders’ mood, which will help traders to formulate their trading process and help you to understand the ongoing market dynamics.

Building the trading context helps traders to device their trading methodology based on the current market conditions. And more to that keeps you to stay objective on your trading decisions and brings the flexibility to adapt to the changing markets conditions.

various trading strategies perform very differently during different market phases. There are times the market dynamics change faster than we anticipate and knowing the market context helps you to take better trading decisions at the time of chaotic market conditions.

What is the Best way to get the Market Context?

Knowing the market context starts with relevant data collections. It be done by collecting the following list of information which helps you to prepare for the upcoming trading week or trading month objectively

  1. Top-down multi time-frame approach
  2. Macro-Economic events, Impactful news and Event Risk
  3. Market Expectation (Euphoria, Panic, Disbelief..etc)
  4. Option Writers Positions (Open Interest, Implied Volatility)
  5. How you are going to manage your trade in the given conditions using technical analysis + with your trading experience.

Top-Down Approach – Multi timeframe Analysis

Every objective trading analysis starts with Top down analysis. Every week or every start of the month you should look into the overall structure of the market from various timeframes (Monthly, Weekly, Daily) and

  1. understand which timeframe is trending and which timeframe is consolidating.
  2. to understand which timeframe is generating more momentum and which timeframe the momentum is slowing down.
  3. have a perspective about ongoing market volatility. Is the recent market fluctuations are accelerating or slowing down?
  4. Mark the important reference levels that you are finding relevant to the current trading context.
  5. If the markets are trading in a range (consolidation) what are the odds of continuation of the sideways price action
  6. If the markets are trending, think what are the odds of a trend reversal, what was the current market sentiment. Is it Euphoric?
  7. Is the market trend is difficult to determine? Is the market is totally chaotic? Which strategy could work better in this scenario?
  8. Have a bird eye perspective and try to trade the immediate trend if the scenarios is not euphoric or extremely fearful. And think about the odds of trend reversal only if you are seeing euphoric price action.

Doing the top down analysis is the mandatory step before you get into the your core technical analysis which will help your analysis to stay objective and more than that help you to identify how small / big a trading opportunity is.

Macro-Economic events, Impactful news and Event Risk

Collect relevant information which could have a short term impact on the markets. Macro-Economic events and the news based information on heavy weight index (For Example News on Reliance or Earning Results announcements on heavyweights like Reliance, HDFC Bank, ICICI Bank, Infy, TCS)

Dont try to interpret the news but just aware about when the news is getting released. Interpreting the news is meaningless and the market sentiments changes faster as the markets are always forward looking and little it care about the past information.

Subscribing to twitter alerts from redbox india to know about the ongoing macro events, breaking news or surprise macro announcements.

Stay away from interpreting too much about the publicly available information

  1. SGX Nifty
  2. ADR Prices (NYSE)
  3. London GDR Prices
  4. Asian, European, US Markets performance
  5. Brokerage Reports
  6. Put-Call Ratio

This will keep your emotional levels at the check and you will be staying away from unwanted bias. At the end of the day, we are traders so we need to stay focused only on relevant information and ignore the information that is irrelevant or of low importance.

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Measuring the Market expectations

Market expectations can be calibrated in various ways

  1. How a particular stock, index is valued among the general public
  2. what the crowd is saying (social media talks, media opinions, polls)
  3. How the Implied volatility / VIX is positioned relative to the ongoing macro economic factors.

measuring the market expectations have little value to your trading decision on day to day basis, because the expectations in the market always fluctuates and vary from trader to traders as different people take different style of risk.

But there are times when a single sides opinion takes place which brings a low risk – high reward trading environment most of the time. That is the best place to trade against the entire crowd psychology.

The better way to understand the market expectations is using tools like market profile which helps the trader to understand how other traders think in the current market environment.

Knowing the Option Writers Positions

Before the start of the week learn to get a perspective about how the option traders are positioned for the week and what strike price the option writers are crowded. And how the implied volatility is positioned for the week.

This will largely help you to see the possible trading range and which strike price to trade if you are a option trader and also help you to gauge whether option price is cheaper or expensive.

Managing your Trade and Expectation

Based on all the above factors how are you going to positioning yourself. This is the biggest of all the part because your real time trading decisions happens here. So a game plan is required to take the realtime trading information.

  1. Are you coming into the market with larger expectations or with controlled expectations?
  2. Are you going to trade at the open or going to wait for the market to settle down?
  3. What kind of trade setup or market confidence you are expecting?
  4. Is the market moving as per your expectation?
  5. Are you planning for re-entry or stop and reverse?
  6. How you are going to handle your positions if all of a sudden if the markets shoot up or drops down?
  7. Are you going to finalize your stop-loss immediately or after some time?
  8. Are you comfortable in not to initiate any trades and willing to wait as long as you are not seeing any significant trading opportunity?

Always remember, a trade taken without knowing the current running context always have larger consequences at some point of time and it often ends on blaming technical analysis by amateur traders.

I guess the above insights will help you to control your market expectations as the trade unfolds and help you to focus on the right market context and stay away from irrelevant information as much as possible.

Rajandran R

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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