Careful preparation is crucial to successful trading, according to Jack Broz, because it frees traders to concentrate on order flow during the trading day. Broz and Saul Shaoul, partners in The Marlin Letter, are both long-time CBOT® members who have moved from the trading floor to screen trading. However, Broz also operates an online chat room from the CBOT floor so he can sense the mood of the market as only people on the floor can do.

The primary goal of these two very active traders, Broz says, "is to find scalp trades in the market that have a high probability of 'running' into more sizeable winners". He adds that in placing these trades, they "like to keep our stops very tight, and we trade off levels and order flow". The levels Broz refers to are predetermined prices expected to offer support or resistance, or that serve as targets for the traders.

"This approach makes trading CBOT 30-year Treasury bonds, 10-year Treasury notes, and mini-sized DowSM futures a perfect fit primarily because they are all deep, liquid markets", Broz says. "All of these contacts also trade very well technically, and with the CBOT electronic platform being 'first in, first filled', our strategy of using levels lets us get in the queue early and results in a higher percentage of fills".


Finding Key Levels

In preparing to trade Treasury futures, Broz and Shaoul use a combination of technical analysis and indicators. Broz emphasizes that "We do our analysis prior to the start of the trading session. We rarely, if ever, look at charts or indicators while we are trading". Having done their analysis before the trading session begins, Broz adds, "We know what prices will be important. This lets us concentrate on the order flow to determine how best to execute our trades".

The first preparatory step is to accumulate market highs and lows from charts covering various time frames: life of the contract, year, quarter, month, and week. They also locate any 50 percent retracements of these ranges and look for any prices that repeat. "For example", Broz says, "if the low of the week is also the midpoint of the month, that price becomes a level".

The next step is to look at the charts for any trend lines, double tops or bottoms, triangles, head and shoulder patterns, or gaps. This search will uncover more levels. A double top pattern could become a target price, or a head and shoulders pattern might indicate a good level for a stop-loss order. "But perhaps more importantly", Broz says, "this part of our analysis provides us with the 'big picture' of the market. This big picture view will help to keep us on the right side of the market with our scalp trades". Suppose, for example, the week's trade has been edging lower, but when Broz or Shaoul look at the yearly chart, they notice a recently-triggered double bottom pattern. Broz points out, "This tells us that the big picture is bullish, and we'll need to be careful scalping from the short-side in the market". Having gathered all this information, the next step for Broz and Shaoul is to consider where the market has been since they last traded. Since Broz and Shaoul trade during the CBOT’s open auction hours (7:20 a.m. to 2:00 p.m. Chicago time) they look at 5-minute charts of the trade from 2:00 p.m. to 4:00 p.m., and from 6:00 p.m. to 7:15 a.m. (all Chicago times) to locate the highs and lows that will become more levels.


Once the Market Opens

With 12 to 15 price levels firmly in mind, and before the open auction market opens, Broz and Shaoul go into the order book and place a buy, sell, or stop at each of these levels.

Broz cites a typical example: "Suppose the T-bond market is going to open at 107-16, and we have defined 107-22 as a resistance level. We will place sell orders in the queue at 107-22 in order to establish a short position. Further, if our technical work reveals that the bond market should break hard if it breeches 107-08, we will place sell stops to enter a short position at 107-07".

After placing these orders in the queue, Broz and Shaoul turn their full attention to watching the order flow. This should help them locate more trading opportunities. "We look to see who is more aggressive, the buyers or the sellers", Broz says. "If each trade at the market open takes the offer and immediately bids for more, causing the prints (i.e., Time and Sales) to show a sequence of the form 107-16, 107-17, 107-18, 107-19, we might decide to get long at 107-20 and use the 23s we parked (that is, the original preopen sell order that is resting in the queue) to take profits".

While Broz and Shaoul use an array of technical tools in preparing for a trading session, Broz believes it is a mistake for traders to overlook the fundamental economic reports. Such data as that contained in the reports of the U.S. gross domestic product, the consumer price index, and the producer price index (to name but three) attract extraordinary attention. Because new Fed Chairman Ben Bernanke has said future Fed policy will be responsive to these reports, Broz says, "It would be a missed opportunity to not trade the Treasury futures".

When these and other economic reports are due, attention to the order flow they trigger can lead to rich trading opportunities. "At The Marlin Letter, we advocate going into these reports flat", Broz says. "Our strategy is to let the news come out and let the market tell us where it wants to go. With our pre-determined levels firmly in mind, we enter the market a few minutes after the initial reaction to the report". Even these brief examples serve to show the importance of careful preparation. These trades are in no way accidental or lucky. Rather, they result from the careful work Broz and Shaoul do before the trading session which both tells them what signals to look for and allows them to concentrate on the developing order flow.



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