Wednesday, March 24, 2010

Finding Opportunity in Choppy Markets

My experience for much of the past year is that intraday traders, both independent and at proprietary trading firms, have been struggling to make money. This is because of two reasons:

1) The general drop in daily volatility, creating slow market conditions;

2) The increased choppiness of markets, some of which is attributable to algorithmic trading.

But can traders turn these challenges into opportunity?

David Aferiat of Trade Ideas has recently posted on the topic of finding opportunity in the market's traps. He offers a strategy that relies on mean reversion as a trading opportunity and shows the recent backtested results for the strategy. The post is worth a thoughtful read, because it illustrates the kind of thinking that can succeed in current market conditions.

The general idea is to find points in the market in which bulls or bears are trapped: they have committed to positions, but can no longer move the market their way. It's when they have to scurry out of their positions that the market reversals provide a trading opportunity. Note that this is the foundation for the transition pattern that I recently posted.