Key Market Metrics

‘Technical Analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.’ John Murphy’s definition, taken from his seminal work Technical Analysis of the Financial Markets – often referred to as an industry bible – is one which is repeated in journals, articles and internet forums across the trading community. However, what the majority of novice traders fail to realise is that although the underlying principles of the patterns he describes are valid, there is a lot more to consistent profitability in a live market than simply executing Murphy’s set-ups.

One of the core elements of our Trading Floor Training programme is the observation, recording, discussion and subsequent implementation of what we call Key Market Metrics (KMM). KMMs are the objective, market-generated patterns of price activity that form the basis of a trading approach. As professional traders we have to be able to answer questions such as: over how many ticks does my market fluctuate under normal conditions? In an aggressive, fundamentally-driven sell-off, by how many ticks does my market fall? When it is falling in this manner, what would a typical retracement be before the preceding trend continues? These metrics change on an ongoing basis depending upon numerous factors including: the release of market-sensitive economic news, the degree of fear and uncertainty that permeates the global financial markets and even the time of day. By tracking them in real-time, daily, we are able to adjust our trading to maximise profit opportunities and minimise losses.

Traditional Technical Analysis is heavily constrained by the timeframe being employed on a chart. Whilst it is convenient to analyse markets in 15 or 60 minute periods, novice traders must understand that these rigid timeframes are artificial. Markets ebb and flow as a result of support and resistance, buying and selling pressure and not the time setting on your charting software. Charts also fail to represent in an effective manner the trading volume and order flow (market depth) that causes support and resistance to occur. We use this information as our ultimate decision making tool, not the charts. Those traders who seek to identify trading opportunities from their charts using rigid timeframes, without the appreciation of KMMs and the market depth, will struggle to achieve the consistency of performance so cherished in the trading world.