I'm looking forward this week to speaking with developing traders at SMB Capital, where I will share many of the lessons I've learned working with successful portfolio managers and teams at top hedge funds. For those interested in hearing some of those lessons, I'll also be talking with My Investing Club at 4:15 PM ET on Thursday the 28th; the link to register is here.
As a rule, it's important to know what is happening at time frames larger than the ones you're trading and also to know what is happening at time frames shorter than your typical holding period. The larger time frames place your trade idea into perspective, addressing whether--bigger picture--we are in range markets, trends, etc. The shorter time frames provide you with the concrete information needed to turn a good idea into a good risk/reward trade. So, for example, I might have the idea that stocks have entered a downturn due to "higher for longer" interest rates. I might then wait for weak bounces at lower price highs to exhaust themselves to enter trades on the short side.
When we become locked into single time frames, we can find good ideas but trade them poorly or we can find good trades that ultimately don't play out when they are swamped by what is happening in the bigger picture. Success in markets requires the deeper thinking of idea generation *and* the faster thinking of trading.
The most successful traders, however, go beyond deep and fast. They also see broadly. They don't just look at their stock or market; they look at other stocks and markets to place what they see in context. Specifically, there are two questions traders ask to think broadly:
1) Is the price action I'm seeing correlated with what is going on in different markets? Is this a move specific to a stock, sector, or overall stock market, or is there a bigger macro picture impacting currencies, rates, and international markets?
2) Is the price action I'm seeing accompanied by significantly different volume, volatility, and breadth than we've been experiencing recently? This gives us an idea of whether the market move is the result of new, larger participants entering the marketplace, which could help sustain a trend.
In the case of the recent stock market weakness, note that this began with the Fed announcement and subsequent conference call. During that trading session, we saw sustained negative levels of the NYSE TICK that we had not experienced recently. Following that session, we've seen very negative breadth and an expansion of stocks making fresh one- and three-month lows. Most importantly, during this decline, we've seen a significant rise in longer-term interest rates and strength in the U.S. dollar. In other words, the macro picture was perceived to have changed as a result of the central bank communications and larger institutions have acted upon this information. Seeing such dynamics in real time is essential to both trading and investing.
I look forward to building on these ideas in my group coaching sessions this week. If we can view markets deeply, quickly, and broadly, we'll be best positioned to know what to do and why we're doing it. A good trade requires vision; great trading requires flexibility of vision.
Further Reading:
Short Term Trading With NYSE TICK - A Three Part Series
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