Sunday, March 25, 2018

Focus and Flexibility: Why So Few Traders Are Participating In Recent Market Moves

Friday's trade in the ES futures/SPY presented an excellent lesson to traders.  We opened strong, moved lower, and then traded within a range through the morning and early afternoon.  During that initial portion of the day, there were good short-term swings to participate in for nimble traders who were focused on the minute-to-minute action.

The larger trade occurred in mid afternoon, with the breakdown from the range.  This occurred on high volume with very negative NYSE TICK readings, indicating a broad market selloff.  Indeed, that breakdown took us to lows of the day.  To see that trade, however, required a bigger picture view of what the market had been doing the last several days and how it had formed a range early in the day.  The key identification was that the market was *already* oversold and yet could not sustain a rally above its opening high. 

The focus to see what is happening on shorter time frames move-to-move and the flexibility to move to higher time frames for a larger picture is a combination that I see among successful traders.  As I mentioned in my recent article, this represents the ability to continually frame hypotheses about the market and update those based upon unfolding market behavior.  If the shorter-term market behavior is a text that we read with focus, the larger picture is a context that requires flexible perception.  

Quite a few traders I've spoken with have been frustrated.  With the recent volatility, they perceive opportunity, but their results have not reflected this.  My sense is that two problems account for this:

*  Short-term traders are so busy focusing on the immediate swings that they miss the larger patterns, such as Friday's break from a range;

*  Longer-term traders are so busy focusing on possible trends that they enter at poor levels and get stopped out by the market swings.

What I saw working on Friday was the flexible switching from microscope to telescope, as the short-term movement constructed a longer-term pattern and opportunity.  More successful traders have been better at constructing hypotheses, validating and invalidating them, and moving on.  They demonstrate a higher idea velocity, but also display a rigor in implementing those ideas.  Actively talking ideas aloud in a team context is one way to turn the idea wheel quicker, with accountability and rigor.  Building a trading process that implements rapid review on multiple time frames is a great way to exercise and strengthen our cognitive processing.

Further Reading: