This week I'm looking forward to speaking with Growing Traders at SMB Capital, where I'll share many of the lessons I've learned working with successful portfolio managers and teams at top hedge funds. For those interested in listening to some of these lessons, I will also be speaking with My Investing Club at 4:15pm ET on Thursday the 28th; Registration link here.
As a general rule, it is important to know what happens on time frames larger than the one you are trading as well as know what happens on time frames shorter than your typical holding period.. Larger time frames put your trading idea into perspective, and address whether we are – the bigger picture – in markets ranging, trends, etc. Shorter time frames provide you with the tangible information needed to turn a good idea into a good risk. Bonus trade. So, for example, I might have the idea that stocks went into a recession because of “higher for longer” interest rates. I may then wait for weak bounces at the highs of lows to exhaust themselves to enter trades on the short side.
When we become locked into one time frames, we can find good ideas but trade them poorly or we can find good trades that ultimately don't work out when overwhelmed by what's happening in the bigger picture. Success in the markets requires deeper thinking in idea generation *and* faster thinking in trading.
However, the most successful traders go deeper and faster. As they see Widely. They don't just look at their stocks or the market; They look at stocks and other markets to put what they see into context. Specifically, there are two questions for traders to think broadly:
1) Is the price action I see related to what is happening in different markets? Is this a stock, sector or stock market specific move in general, or is there a bigger macro picture affecting currencies, prices and international markets?
2) Is the price action I'm seeing accompanied by significantly different volume, volatility, and breadth than what we've seen recently? This gives us an idea whether the market movement is a result of larger new participants entering the market, which may help maintain the trend.
In the case of the recent stock market weakness, note that this began with the Fed's announcement and subsequent conference call. During that trading session, we saw sustained negative levels for the NYSE that we had not seen recently. After that session, we saw very negative breadth and stock expansion hitting one-month and three-month lows. More importantly, during this decline, we have seen a significant rise in long-term interest rates and a strength in the US dollar. In other words, the overall picture was seen to have changed as a result of central bank communications and larger institutions that acted on this information. Seeing such dynamics in real time is essential for both trading and investing.
I look forward to building on these ideas in my group training sessions this week. If we can see the markets deeply, quickly, and broadly, we will be in a better position to know what to do and why to do it. Good trading requires vision; Great trading requires flexibility of vision.
In-depth reading:
Short Term Trading with the NYSE Marker – a three-part series
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