Why focusing on broken ATM trades improves your trade outcomes

The arch-nemesis of the directional trader?

Efficiency. Periods when all known information is reflected in the price. It's unlikely price will move meaningfully to profit from.

The trouble is, without an awareness of when market efficiency falters, most traders are firing shots in the dark, hoping to catch these lucrative trades.

However, their shots are aimless. Catching a 'one-way traffic' trade is mostly a matter of luck and doesn't compensate for the losses incurred for missing. Hence the saying, "You win some—you lose more."

Instead, you're looking for the rare occasion when market efficiency breaks—resembling a broken ATM spitting out a continuous stream of 100-dollar bills to those who know what to look for—a frenzy of aggressive buying or selling activity that dominates the market. Described as a 'strong move', price is 'one-way traffic' only.

But here's the kicker

Market opportunities frequently resemble the deceptive tactics of chess. Often, the winner purposely disguises the outcome (checkmate) by allowing the opponent 'small victories'—taking a bishop, knight, pawns, or rook (castle)—on the journey to their ultimate demise.

Like chess, the element of surprise is the catalyst for the outcome—checkmate in chess, broken ATM in trading.

I refer to the period leading up to the broken ATM trade erupting as 'before the outcome is known'.

It's a critical part of your strategy because if you wait until the outcome has taken place, you'll miss out. Make sense?

It requires knowing the deceptive moves and which market participants will fall for them. As Michael Marcus, who turned 30K into 80M, said, "Successful trading is anticipating the anticipations of others."

Once you're aware deceptive tactics have ensnared enough competitors to fuel the broken ATM trade, the next challenge is knowing the exact timing of the trade erupting.

It's a challenge because you're not pulling the strings; you'll ride along on the coattails.

Take Monday

The first attempts to enter a trade to erupt to the upside were in vain. You can see the buy entries and subsequent exits in the chart below.

What happens next?

They highlight the need for precision and timing skills. The reason to exit is not a 'gut feel'; it's market evidence-driven. But without these skills, trades are entered only to quash hopes and dreams as the price moves further and further against you until you're facing an outsized loss. Sound familiar?

What do you know about it being by design?

If too many of us try to ride the coattails, the market will flush many out. Why? Because this business is about the majority paying the minority. Like poker, there's no such thing as an even distribution of winnings in trading. Correct?

Shortly after the above trades, the market moved significantly lower, and hangers-on were washed out of the market for a loss.

One of the 'easiest' trading edges is outlasting the competition. But it's only accessible if you know how the game works. If not, you fall victim to what I refer to as the 'time-trap'.

The broken ATM trades occurred hours later. The last of which was 6 hours after the initial trade above.

The reason for showing one of the trades is to illustrate how the price was one-way traffic, an example of when trading takes on the appearance of seeming effortless.

 

Notice in both charts the buying was in the same pricing area?

If held, the first attempt would have resulted in an epic fail (and loss), while the second time was successful. As mentioned, this is by design.

Why else do broken ATM trades transform your trading?

I've already touched on it: Winnings aren't evenly distributed—the majority pay for the few to win.

When you shift your focus to broken ATM trades, you join the prosperous few and remove yourself from the majority who are net losers.

It's a powerful reason to focus on inefficiency in the market. Agree?