Last Updated on 17 November, 2020 by Samuelsson
Have you noticed that many traders have several monitors in front of them when trading? We know you may be wondering why they do that, so today, we are going to help you understand why traders use multiple monitors.
Traders use multiple monitors to be able to keep track of things happening in the market, such as:
- Order flow
- Technical charts of different timeframes
- Information about the market, like sentiment indexes
- Technical charts of different markets
Let’s find out how traders make use of all that information in their trading. We’ll take them one by one!
1. How Traders Use Order Flow
Traders use order flow to identify buying and selling pressure in the market, which can help predict the next direction of price. Order flow is often used together with technical analysis to find better entry and exit levels, as well as decide the type of order — market order, stop order, or limit order — to place in the market.
Reading the order flow is an old stock trading technique for day traders and scalpers. The order flow shows the market depth — the depth of supply (ask/offer) and demand (bid) in the market. In other words, the order flow shows the buy limit orders and the sell limit orders in the market.
By reading the order flow, a trader can see the size of orders at various price levels and will be able to identify the price level where there are huge buy or sell orders. So if a trader wants to place a market order, he could see if there’s enough liquidity at the current price level to take up his market order without significantly moving the price.
For example, let’s say the current price of XYZ stock is $201.1/201.3. Assuming Trader T wants to buy 10,000 shares of the stock and the order flow is as follows:
|Price level ($)||Bids (shares)||Offers (shares)|
If Trader T goes ahead to place his buy market order, the majority of his 10,000 shares will be bought at $204.5 and $205. With this information, he can decide whether or not to go ahead and place market orders. Alternatively, he can choose to place a limit order just below $200, knowing that there will be huge stop orders (sell stop and stop loss orders) because $200 is an important round number. And, it will only take him about 3,000 shares to absorb all the bid orders and push the price firmly below $200 level.
However, it is worth noting that order flow can only show limit orders and not stop orders. Trader T will have to use his technical analysis experience to guess that $200 level is an important support level. So order flow is combined with other technical analysis methods to help in trading decisions.
2. Why Multiple Timeframe Analysis?
It is good to watch what is happening in other timeframes when trading. Some traders use three timeframes: the normal timeframe for finding trade setups, a bigger timeframe for identifying the predominant trend direction and major support and resistance levels, and a lower timeframe for finding better entry levels.
For example, a trader who is trading on the 1-hour timeframe can have a daily or 4-hourly timeframe and a 15-minute or 5-minute timeframe open, in addition to the hourly timeframe he’s trading.
3. How Traders Use Sentiment Indexes
Sentiment analysis helps traders to know the number or the percentage of traders who have taken a particular position in a security. It is more useful for those securities that trade on standard exchanges, such as stocks, futures, and options, where the full data can be obtained.
Knowing the percentage of traders in different positions can help a trader know when to start looking forward to a price reversal. For instance, if 90% of everyone trading a specific stock is long, there may not be many traders left to push the price further up, a trader can assume that a potential price reversal is around the corner. This way, sentiment indexes act as contrarian indicators.
If you want to learn more about sentiment indexes, be sure to read our guide!
4. The Need to Watch Different Markets
Some traders like watching other markets when trading because it can give them a clue about what might happen in the market they are trading. Some markets can correlate to a great extent, so a change in one market may indicate a potential change in the other. Correlation can be positive (same direction) or negative (opposite direction).
Furthermore, many traders trade different markets at the same time. Keeping charts of different markets help them to find new trade setups immediately they occur in any of the markets they are watching.
Does a New Trader Need Several Monitors?
A new trader may not need to have many monitors when trading to avoid information overload and analysis paralysis. For a new trader, what matters is the ability to properly execute the trading strategy he has learned. So it is important that he keeps his trading method simple at first.
With time, as he perfects his strategy and learns new techniques, he may then use more monitors to make his analysis faster. In other words, the need for more screens arises with time, as a trader realizes that he needs to have more information easily accessible.
The Trading Style Matters
Using multiple monitors also depends on the trading style. A swing or position trader will often have enough time to analyze the market because the setups for such styles of trading take days, or even months, to occur.
However, for fast-paced trading styles, such as scalping or day trading, there’s limited time for market analysis. These type of traders will need to access many data feeds at the same time, so they need to use multiple monitors.
When it comes to algorithmic trading, you are dealing with a lot of information, since you are doing advanced backtests, and often need to have several programs or charts open at the same time. Therefore an algorithmic trader might benefit from having several monitors, while it still not is a necessity. What it really comes down to, in the end, is productivity.
Traders use multiple monitors because they need to keep track of things like order flow, technical charts of different timeframes, market sentiment indexes, and technical charts of different markets.
If you enjoyed this article you might also like our other articles answering common questions traders have!