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It pays to think deeply about markets, how they move, risk, opportunity, and how it all plays out in the grand scheme of probability. We can and should spend a lot of time crafting our trading plans, understanding our risk tolerance, and monitoring our adherence to those plans. But, in the heat of the moment, trading does not have to be complicated. Though there may be tremendous quantitative work supporting a method, often the simplest tools work best. One of my favorite patterns is simply knowing when something has changed in the market.

s sigma upI took the screenshot above yesterday (10/6/14) midday when I noticed that many of the grains were putting in large standard deviation up days, which is another way to say that they were making large moves relative to their own volatility. Here is also a case where the right tools can be helpful; would you have seen that this was a significant day based simply on looking at the chart? Maybe, but the SigmaSpikes (a tool that I use extensively in my published research) below the chart quickly highlight the significance of this move. On a volatility-adjusted basis, this was the largest upward move in nearly a year.

Now, this is only the first stage of analysis, but it is an important one. Over the years, when I have worked with, coached, and trained traders, I used to jokingly call this “hey, that’s different!” Truly, it is not a joke. Noticing that the dominant market pattern is shifting can be an important piece of information.

The point of this is the concept, rather than the specific example here. Find an obvious break in the existing market patter, and then pay attention to what happens afterward. So, what can be different? Here are some examples:

  • Largest volatility-adjusted move over a certain time period.
  • Obvious move that breaks a chart pattern.
  • Counter-to-expected breakout, but, again, it must be obvious.
  • Sudden, sharp reversal like a single day that reverses the previous week’s movement.
  • Quiet market goes into an extended period of volatility, or vice versa.

This is just a starting point, and the list really could go on. One key point: though this is a simple concept and is simple to use, it must be based on things that really work. If it is based on technical ideas that have no foundation in market reality (examples might be moving average touches, crosses, or breaks; retracement ratios; most indicator patterns; etc.) then you are only analyzing insignificant noise. Understand how markets really move, how they usually move, and then–look for something that breaks the pattern. Look for something that jumps out and say, “hey, that’s different!”