Nov 302010

Benkotrader posted an excellent comment the other day and it deserves its down post.  I’m not very good at chess, sometimes when I trade it’s like I’m playing AntiChess but the analogy is great.  And the summary of the open types is excellent.  I use this thought process before every open.

Here’s his comment:

Hi Michael,

Thanks for mentioning me on your blog. Let me start by saying that I really like your trading approach. I too am constantly working on my trading in the hope to be able to trade full-time one day.

I think that you are absolutely right in waiting with creating hypotheses when we are closer to the open. These days the Globex moves and ranges have become substantial so that the market’s position in relation to prior day(s) value(s) and range(s) can change within a few hours. Also, I totally agree that it is crucial to think of opposite scenarios. I see strong analogies between trading and chess and I very much like to think in these analogies.

In chess, you have two forces fighting for control on the board at any given time, whereby there is always one single “best move” for White just as there is one “best” move for Black. Though they are there, very often the players will not see them due to the complexity of the position, or maybe even see them but for some reason still not take them, just like we do not always take the best trades. However, in chess, like in trading, a position will generally give the players many other good or at least acceptable moves which will keep them in the game.

Next, in chess White and Black always have a plan which they must adapt in accordance with the last move that occurred on the board – just like in trading, where we have to “flow” with the market and change plans to reflect constantly changing configurations. Finally, and this is something which I think is crucial, a professional chess player will not make a move unless he has fully understood the position on the board – this is left to amateurs who make moves because they “look” good (only to find out that they cost them the game). The professional chess player’s understanding of the current position is a function of a deep, computer-like analysis or intuition (mostly both), it can come within hours, minutes, or seconds – sometimes a chess player won’t see the “right” move for a long time, sometimes it will just jump out immediately. The same holds true in trading where all our decisions are made at some point between complex calculations and intuition.

Finally, a chess player’s understanding always includes the opponent’s position and the opponent’s options. And this is why you are 100 % right – we must always think of opposite scenarios. That day, when we opened out of range, I was expecting responsive selling which would bring us nearer back to prior day’s value, however the Open Drive which occurred immediately made me abandon this hypothesis very early. Like Dalton often stresses – much more important than “what took place” is what “should have taken place but didn’t!!!” In this case the expected responsive behaviour did not occur, opening a new scenario.

One more word in relation to openings and how I approach them. In an attempt to make life easier for myself I have structured the opening types by the place they occur relative to prior range and value. One result of this classification is the following:

Basically, when we open out of prior day’s range, I already know that OTF will most likely step in at some point (as the perception of value has changed positions must be reassessed, closed, opened, defended, etc.). So, the immediate question is for me: “Can I see a drive by OTF?” If yes, I MUST expect an OD and in fact a Trend Day until proven wrong – there is really no other logical conclusion at that point. If no drive occurs immediately, the market might have to commit itself first before OTF decides to move it in one direction or another. This could happen through a test of a level, giving us an OTD, or a failure resulting in a ORR which will probably lead us back to value. Should neither occur, we are likely to stay out of range and have and OAOR which tends to be rotational while OTF buyer and seller are fighting for control.

This classification greatly helps me to see both sides of the board, to use the chess analogy, and to keep my expectations within a logical framework. You are a programmer so you will see that the last paragraph could even be translated into a flow chart and thus serve as a quick “what to expect”-reference. In fact, I might even do this for myself :)

I hope this helps!


Looking forward to a flowchart type reference for the open type.  And one for day type too.  Thanks for sharing.

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