How to spot low-hanging fruit trade opportunities
Quick question, what's 68 multiplied by 4,561?
Three, two, one; time's up.
Amongst an intake group for a proprietary trading firm I was part of, most could mentally calculate the answer within seconds. While the overwhelming majority of candidates were maths/physics/engineering graduates, dig a little deeper, several were trying out for this prop trading firm, having not been accepted by the likes of market-making firms such as Optiver.
From the careers section of Optiver's website "Are you interested in an environment where new challenges arise .... by the nanosecond?"
One of the Optiver trading desks
Anyone in the front of the screens during March has witnessed an increasing dominance of market-making behaviour, and when they dominate, you cannot compete. The scale of the infrastructure and the traders' collective brilliance at market-making firms make sure of this. And did I mention the speed of their antics? It is lightning!
Further, the nature of market movement has changed character. I see frequent phases of price moving in roughly equal magnitude in both directions on an intraday basis. Add fast-paced market-making into the mix, and it's understandable traders are being beaten up.
Amidst all the variance; however, $AUD has provided "low-hanging fruit" opportunities daily. But there is a caveat here.
In working with traders, a focus is to develop a broad trading skill-set (see essential trading skills), adaptable to changing market conditions. $AUD is terrific for developing depth because it continually transitions from one behaviour to another. Initially, it's challenging; however, with time and application, the ability to differentiate between the various phases leads to participating when the market behaviour and skill align and standing aside (but working in SIM to bridge the gap) when they don't.
Depth's real strength, however, is seeing the low-hanging fruit in the market.
The low-hanging fruit has two forms
Scalps that have a high success rate and,
Larger moves that don't retrace after adding size which is perfect for increasing your position without increasing risk
Low-hanging fruit trades always incorporate problem-solving, conducted during pre-trading preparation and real-time. Oh, and low-hanging fruit trades take little heat.
Background
Pre-market preparation concluded China's fiscal measures to prop up the local bourse was the likely reason for outsized volume conducted by program trading in $AUD during Hong Kong market hours.
A correlation between the equities tech sector and the $AUD was in play.
Low-hanging fruit long scalp
Large professional traders would remain sidelined until at least the HKE trading session commences observing the impact of China's possible further intervention to support the local market.
Failing to hold onto early gains because it's not a heavy tech market, the ASX descended into what would soon be negative territory.
Amateurs were likely to sell $AUD due to the sell-off in ASX because they would incorrectly correlate recent movements in the $AUD with overall global equity movements.
Due to the lack of professionals participating, the trade would only produce a small-sized win.
The trade idea was to fade the sell-off once it developed momentum and exit the position ahead of a recently established change in relative value.
Low-hanging fruit more significant play. The bold text highlights the low hanging fruit characteristics.
Unaware of shifts in relative value, many participants had initiated shorts into and below 0.77673.
Nasdaq futures moved up rapidly off their Globex lows, and $AUD followed (a current theme in play).
Offside shorts cover, however, due to lack of market acceptance, an aggressive move upwards occurs.
The Nasdaq reverses, $AUD does not, indicating the correlation trade is now crowded and therefore failing. Shorts entering at approximately 0.7686 with no downward price movement to follow confirms the correlation is over-crowded. The uncrowded opportunity is going long.
Size is added to the current position using the trade's existing cushion to finance the risk.
Likely to trap traders, pre-trading preparation noted an outdated relative value area at 0.7836.
For prudence, the trade was partially closed when the market rotated at the outdated value. New shorts entered at this level, not aware the level is no longer relevant. They become the fuel for further upside. The position was closed in time for the European open.
$AUD moved a further 50 basis points above the outdated area during the European and US sessions
The light bulb moment for a trader who can adapt to all of the varying market conditions is realising it's an uncrowded skill. Every time the market changes character or behaviour, plenty of traders cannot compete, repeatedly providing low hanging fruit for the trader skilled at trading in all circumstances.
Closing points
As a general rule, the more significant the problem-solving in developing a trade, the greater the payout.
The examples above only represent a fraction of an entire day's trading. Of the many trades I place each day, numerous trades are scratched, exited for a minor draw or profit, or small loss.