Thursday, March 18, 2010

How to Trade a Slow Market

What I'm finding is that a critical part of making money in a slow market is early identification of day structure. Note how the AM briefing post before the open hypothesized a range trade; modest volume readings and a limited range of NYSE TICK readings with neither positive readings > +800 nor negative readings < -800 supported that hypothesis.

Once you have that idea in place, you then wait for moves away from the volume-weighted average price (VWAP) and wait for the buying/selling to dry up. Then you make the trade for a move back through VWAP and wait for that move to materialize in a low volume/low volatility environment.

Note how often I'm using the word "wait". As long as the market is not actively disconfirming the hypothesis about day structure, you don't act.

What kills traders in these market conditions is the *need* to trade in and out of markets and overreactions to small market moves. If you don't have a clear strategy based upon your understanding of day structure, it's very easy to get whipped in and out of trades in a reactive fashion.