Wednesday, July 15, 2009

Matching the Time Frames of Your Analyses and Your Trading

Three common mistakes that traders make was the topic of a recent post; if I had to add a fourth, it would be letting longer-term political and economic biases interfere with a shorter-term read of market strength and weakness.

Toward the end of last week, I raised the possibility that we might ultimately hold the May/June lows, which could lead to a bounce back into that long-term trading range. When Monday's weakness could not take out the prior week's lows and we held strength after weakness in Asia, that trading range scenario gained credibility.

Interestingly, however, my conjectures were generally met with a near indignant response from traders who emailed. "How could we go higher when the economy is so weak?" was a common response. The key to the replies, however, was the emotional tone of indignation--almost as if I had insulted their family members.

Those traders had a *need* to believe in a bearish thesis; their beliefs were not grounded in how the market was actually trading. This dynamic is not unique to bears; I found similar indignation when I posted an article to a website in early 2000 comparing the stock market to the exhausted 4 AM dancers in Ibiza. I received many defensive replies, indicating that I simply did not understand the new market paradigm.

The economy may indeed be weak and stocks may ultimately reach new bear market lows. What I know is that the market is not trading that outlook right here and now. As long as more volume is being transacted at the market's offer price and more stocks are ticking up than down, I want to participate in that demand/supply imbalance.

It's vitally important that the time horizon of your analyses fit the time horizon of your trading and investing. Mismatches will take you out of good investments on short-term weakness, and they will keep you out of short-term rallies on longer-term pessimism.


John said...

Absolutely ... in addition, we sometimes get focused in on a scenario and it becomes very difficult to accept the signs of a move in the other direction. We remain focused on the same play that has been working over the last few days and all of a sudden ... the market changes.
How to remain open-minded and objective as we begin each day of trading is my most difficult task.

JimRI said...

Very Timely. I was convinced that the daily candle on the S&P for yesterday was a hammer and while I was aware of Intel and the overnight thrust and before opening enthusiam (CNBC etc) I still passed on opporturnites as my emoting was biased by earlier thoughts.

Ryan said...

When you say "more volume is being transacted at the market's offer price" is this just a qualitative observation or are you tracking this somehow? Thanks.

Brett Steenbarger, Ph.D. said...

Hi Ryan,

That is directly measured via Market Delta per my past posts--


Bear said...

Great post Dr. B.

Not that I took advantage of it, but the key tell in my analysis was individual stock charts. Almost all simply looked like normal pull-backs, as opposed to the trading range bound S&P and DJIA or the well advertised H&S formation many seemed to be keying on.

Dad said...

Guilty! I didn't reply to you, but I held a strong bearish bias, whcih cost me on a few SPY puts due to expire this week.

Not a lot of money, but nonetheless I should have (and did) seen the strength.

Thanks so much for all your time you put into this blog!

Dad said...


I was definately saddled with a bearish bias.

Cost me by hanging onto a few SPY 91 puts due to expire!

I did see the strength, but my bias did not allow me to get out.

Thanks for all you time you put into this!

On the Way said...

I am embarassed to admit it, but my best trading was done during the first 6 weeks when I first started trading 8 years ago. I knew close to nothing about trading, but I had no biases, no opinion at all about the market. I just traded the present action and took more scratches than losses, since I would get out of a stock if it didn't go in my favor from the start.

It seems better to have no opinion about the market at all. Is that so? But then, isn't the goal of technical analysis to have an idea of the probabilities of different scenarios? How does one act on probabilities without forming an opinion?

Not to need to be right certainly helps. But there is more than that...

Ariel said...

To that last question - I believe technical analysis is a way to interpret what price and market action is suggesting about probable next moves, AND remain objective enough to continually refresh to see if new info says an old hypothesis should be abandoned and a new one substituted. It's the resistance to change that makes us prefer to cling to wrong positions. Just my thought.