TheSlayer's Market Thoughts

Some Thoughts About the Current Market

I don't intend to either lecture or patronize. Sometimes, though, I like to set down my thoughts as a way of better understanding them myself and maybe providing something of use to others. If what I write seems either too simplistic or completely irrelevant, so be it, but I believe it is a useful exercise.

As a general matter, we need two things to trade: 1) liquidity; and 2) volatility. The E-minis always have enough liquidity to trade, even at night (though the evenings can become too dull to do anything sometimes). This is probably a function of the robots as much as anything else, but so be it. That's why the E-minis are many futures traders' favorite battleground.

That leaves volatility. The E-minis swing wildly between periods of lots of volatility, and other periods of fairly little volatility. Lunchtime and evenings usually have the lowest volatility, the opening and closing hours of the cash market the most. A nice in-between period is when the Europeans start trading around midnight Eastern time and the subsequent few hours, as they perk things up without many of the overblown pyrotechnics of the cash market.

In my opinion, and I am probably in the distinct minority on this, the periods of lower volatility are the best times for the little guy, the average trader at home, to trade. Those times almost certainly are the best times to learn how to trade. If you are wrong on direction, you'll have plenty of time to think about it and pull the trigger. During the high-volatility periods, if you're wrong, you often don't get a lot of time to think about what you should do before the losses start mounting up fast and furious. Of course, to be fair, you also can see your profits skyrocket faster during those periods, too, so a your preference will depend on your degree of risk-aversion. The greatest danger of trading at night is boredom, but you can almost always find a trade.

Lately, we have seen a surge in volatility. The daily chart is deceptive, because it shows a nice, smooth uptrend, but the intraday moves are something else. I don't have any figures on this, but it seems pretty obvious from watching the market closely that moves are sharper and changing direction with more fierceness than is usually the case. Erratic price swings, abrupt directional movements that end on cue and then suddenly become rangebound before the next jarring move are typical. Perhaps it simply is the summertime effect. The basic technical tools of trendlines and moving averages, though, remain as useful as ever.

Because of this volatility, don't feel bad if you are leaving money on the table because you aren't catching every move that in hindsight can appear obvious. It's easy to be decisive and sure of yourself and wind up poorer. This volatility is tricky, and then for good measure they will throw in a wild card (flash crash, ordinary piece of economic data that inexplicably sets off a firestorm of buying, etc.) to mix things up further. Even the most experienced traders are confused by this market at times. If you aren't profitable in this rising market, though, give some serious thought to what you are doing, and why. The reverse also is true: don't fall into the trap of thinking that you are God's Gift to Trading simply because you are having success in a constantly rising market. Keep honing your skills.

In any event, it pays to think carefully about your style of trading. If you are having difficulty, consider simply buying or selling and letting it ride, changing sides only when you clearly see yourself being wrong. Or, if you are experienced enough to do it, grab little chunks here and there and limit your risk, patiently building up your account.

The things you don't want to do are: a) trying to react to every little cross-current; and b) fighting the market. Either type of trading is sheer poison. The more experienced you get or are, the more you realize that the key to successful trading is realizing that sometimes you should wait out the moves against you, but other times you absolutely need to close the position and move on. Knowing which applies in a given situation and pulling the trigger based on your own set of rules without second thoughts makes all the difference between being successful and blowing up your account. What you buy and even when you buy are distinctly less important. Also, in general during volatile times, smaller positions are wiser than larger ones, and that applies to everyone.

Following these simple guidelines may wind up saving your account as this market evolves.