The Markets Give it, and Take it Away
A buddy of mine who is a manger at a prop shop, has this interesting theory about market movement. He theorizes that the markets goes thru regular cycles where it trends cleanly, and making money for position traders seems almost simple, then, when the majority of traders think they have it all figured out, and are risking the maximum amount of money, the market throws everyone off with a series of fast, jagged moves, which goes on longer then the previous trending price action. And in the ensuing choppiness, the majority of traders give back thier gains and then some. The same cycle plays out for demo traders. Just as the demo traders are showing themselves to be profitable and confident, they switch to live accounts, and the markets go from orderly channels to ocean waves in a winter storm. He can pull up a daily chart of any market, be it a stock, commodity or currency and show you this cycle.
This EURUSD chart epitomizes it, with an orderly trend leading into June, followed by 3 months of choppy, sloppy trade, followed by 2 months of orderly, channeling price action.
What my friend Kelly’s theory highlights is the markets tendency to exhibit trending behavior where it gives us sustained, impulsive price action; and then shift into counter-trending behavior where price gets trapped in reactive trade marked by sharp, truncated moves in an overall jagged price range.
The obvious lesson here would be if we could determine at what point a market shifts from trending to counter-trending so we could adapt our strategy. Essentially trading shorter-time frames where we get in quicker and exit quicker during counter-trending periods, and sticking with higher time frame charts with an eye on letting a profit run in trending periods.
Ideally we would go with a strategy that works in both types of markets. By definiton that would mean trading a time frame that’s suitable for both types of markets, which would mean a lower time frame. More to the point it means day-trading, which is essentially not an option for most people given their need of a day-job, and to sleep.
So the answer to the dilemma of position trading?
It’s still letting a profit run. Because that’s the only way you are going to make more during the trending periods than you are going to lose during those counter-trending periods. Unless trading is your job, in which case you’ve already solved the problem, having spelled it out in your trading plan.
Jay Norris
www.trading-u.com
To attend a complimentary one on one tutorial on how we conduct a proper market overview e-mail jnorris@brewerinvestmentgroup.com
DISCLAIMER: Futures, options and Forex (off-exchange foreign currency futures and options, or “FX”) trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures, options and Forex may fluctuate, and, as a result, clients may lose more than their original investment.