Today was a quiet end to the week with just over 1.3 million contracts trading for the day. How many contracts have traded should be of concern to you as a trader, as it gives us so much information on different angles of trading.
I want to discuss a couple of examples about how watching how many contracts have traded will give you a good edge each day. The first hour of the day is quite important as this tends to set the tone for the rest of the session. If you trade the Emini S&P 500 futures, you can tell if it's going to be a busy day or a quiet day quite early on, and you should adjust your trading accordingly. If after the first 30-45mins only 500k contracts have traded, you know it's going to be quite a quiet day. There's probably only going to be one decent move, and the rest of the day will probably range unless there's news to move it. So adjust your trading.
If after 30-45 mins 1.2 million contracts have traded, then you know that is quite a lot by that time of day given the current market conditions. It's most likely going to be quite a busy day with a sustainable move. Adjust your trading accordingly. If you're on the right side of the market, make sure you ride it for what it's worth.
You also need to know how many contracts are trading so you know what's going on. In my first post I used a car as an example of how you should trade. If you know a car sells for $15000 and you see it for sale at $8000, then there's an opportunity for you to make $7000. Remember that trading is the same, today when the market opened up, the market established the 1399.50 area as fair value. We know that the market thought them prices were fair value because that's where everyone did business. We had an early sell off and the market then tried to establish lower prices but people weren't really prepared to do business at lower prices. The market tried to establish value at 1396.50 but only roughly 46k contracts traded there compared to the 75k contracts that traded at 1399.50. If everyone wants to do business at 1399.50, and the market is trading at 1396.50 then the Emini S&P 500 June Futures Contract is undervalued. If it's undervalued.... what are you going to do? Buy or sell?
