Wednesday, July 22, 2009

Keeping Your Time Frames Consistent

With volatility at lows for the year (VIX is below 24) and S&P 500 (SPY) volume also at annual lows, we're seeing quite a few choppy directional moves. This morning, we took out the lower end of the overnight range after the weak earnings reports, but firmed at the open and moved promptly back into the range. We then took out the highs prior to the earnings news before again reversing and moving back into the late pre-opening range.

Such trade either requires great patience--waiting for prices to ultimately hit a target that takes volatility into account--or great nimbleness, taking the moves that markets give you rather than assuming that breaks out of ranges will necessarily continue. Where traders often fall short is by conceptualizing trades (and targets) on a longer-term basis (requiring the patience), but then managing the trades short term. This gets them exiting good ideas at the worst possible times, as markets reverse against them on the way to ultimately hitting their targets.

Contrast that scenario to the patient trader who uses such reversals to scale into positions that are working longer-term.

I'm seeing some profitable traders simply trade hit and run style and take profits when we take out a near term level. That can work well also. But if you are going to hit and run in taking profits, it's important to do the same with losses. Setting targets on one time frame and managing them on another is a recipe for disaster. (See this post for more on the topic).


historyrhymes said...

hi Dr Brett,
I thought you might find the VIX FUTURE/VIX charts interesting as it hinting at a SUMMER/AUTUM 2008 replay.

The divergence btw VIX cash and the future has to be taken as an alarm signal.


OKL said...

Gr8 point Doc, i've lost count the number of times i've formulated a good idea on a bigger picture, but executed it poorly.

And then, after I execute it poorly, I thought my idea might be wrong, when really it was still premature.

Then the market moves somewhat according (to be exact is impossible) to my ideas and I flip over the chair lol

I most recent experience was when the market was at 870s; too long to list it here, but I thought that a move back to 927 wasn't out of the question; executed it poorly (it was range bound at 870s for 2 days) and later ripped higher- I should've asked Ms Whitney out for dinner earlier =X LOL

Same thing right now, but a little wiser- still think the latter half of the rip from 927 to 955 isn't quite as fantastic, but I'm gonna sit here and wait until something lines up.

My main grouse with the latter part is that the sectors are not catching up quite as well and I imagine some corrective action will take place;

1) The market reverses back to correct the inefficiency; sectors remain < than index, suggesting lack of synchrony and market pulls back (bears step in)

2) The market continues higher to correct the inefficiency; sectors catch up with the index and the index runs higher (bulls step in)

3) The market just does nothing like it did in June for X period of time (gone fishing)

From a psychological basis, I don't know what's gonna set the bulls running for the hills and the bears to get their claws out; I mean...

1) BSC ignited the initial fears in Mar 2008

2) FNM/FRE got both camps fighting in Jul 2008 (i remember the dow up 300 one day, down 300 the next)

3) LEH/AIG took the house down in Sep-Oct 2008

4) C/GE gripped the hearts of the investors so tight in Mar2009

Something HAS to happen to test 666 or 740; if earnings alone are going to do it, then it will certainly be a death by thousand cuts (will see more and more bull traps on an intraday basis).

Well, people talk about meltdown all the time... I just think a meltup isnt out the question either.

Basically, I'm very cautious on the short side; not from an intraday basis of course, but the bigger picture suggests so right now.

Ok i've gone off topic... wtf.

Yes, keeping the timeframes consistent is very important; it synchronizes the thinking process with what you see and things become much clearer... helps to reduce alot of the "backward analysis" problem as well.

Gr8 post again Doc, you should drop by Asia sometime for a holiday or something lol- i know the flight time will kill you though LOL

jadenizm said...

saint steenbarger,

this has been a predominant theme in my trading lately. i'll anticipate a move, get in after i form my hypothesis, only to puke a 3-4 tick looser, watch it go 3 ticks more, then do exactly what i had anticipated. this happens at least a few times everyday. ESPECIALLY when trading momentum sectors like metals or ags. good to know i'm not all alone...