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Tasty Skills: Forming Market Assumptions

Apr 28, 2017

By:Sage Anderson

Experience in a subject or craft can unlock a higher plane of understanding and execution. Those that apply determination, persistence, and practice can achieve excellence, even mastery, in a discipline.

From this perspective, the trading industry is much like any other - those who dedicate themselves to excellence have a much higher probability of success.

For traders, one attribute that is absolutely necessary for success is market awareness. This includes knowledge of the product landscape, comprehension of the price drivers in each product, and an understanding of the relationships/correlations that exist between products.

Intellectual curiosity, therefore, plays a key role in developing one's skill as a trader. This is how traders discover more about the financial universe. By studying and observing the markets, traders can establish a baseline understanding to assist them with trade identification and risk management.

A recent episode of Best Practices focuses on the importance of market awareness as well as taking the next step - forming market assumptions.

To trade, one must have an idea, and hopefully a high degree of confidence in said idea. Market assumptions are essentially the trade ideas expressed in positions by which traders hope to profit.

Although market assumptions may vary from trader to trader due to a large, complex pool of opportunities, they are often formulated using the same skill - market awareness. Building an assumption is the process of applying market awareness in order to exploit potential opportunity through a trade idea.

Once a trade idea is established, it can be further vetted to ensure the risk characteristics fit the trader's risk profile, that the timing is appropriate, and that it is the best possible method of expressing a given market assumption.

Contained within this episode of Best Practices is a list of some of the more-widely followed financial products in the marketplace, as shown below:

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The above list represents a good starting point for building market awareness.

By monitoring the movement of these products, the factors that drive price movement, and the relationships that exist between them, new and experienced traders alike will gain additional insight and consequently improve their ability to formulate actionable market assumptions.

This episode of Best Practices also includes a table that highlights the correlations between the above products. A thorough understanding of these relationships is also integral in building effective market assumptions.

Due to the relative importance of this topic, we hope you'll take the time to review the complete episode of Best Practices when your schedule allows. Doing say should help you further build understanding and awareness of various products and relationships in the market.

Going forward, if you have any questions about market awareness or building market assumptions we hope you'll reach out directly at

We look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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