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).