Fresh eyes

When you are working out with weights it's a very good idea to take a pause every few days. In fact if you are doing high intensity lifting most trainers will recommend that you only work out just once a week allowing the torn muscle fibers to recover and grow - which is how you actually build muscle.

Taking a pause is also a very good tactic in trading - something that I, being a degenerate trader, do far less than I should. The only time I take my eyes off the screen is when I travel. Only then do I find myself staring at charts with a set of fresh eyes able to gain insights that I never would have seen otherwise

Spending this long weekend in Vancouver with my son, I had a chance to step away from the day to day action and was shocked at how blind I’ve been in my analysis.

In my chat room we day trade the US stock indices 24 hours a day with  a technique that can be used for both trend and range entries. Like a bi-polar patient I’ve oscillated between trend and counter trend methods for most of the year and although we’ve managed to post good returns it was mostly due to tactics saving us from poor strategy.

But stepping back from the day to day battle I realized that markets - especially on an intra day time frame - are never binary. Indeed equity prices follow a pretty predictable pattern that can be thought of as a spectrum. 

From 1900 NY to 0600 NY prices tend to range and selling tops buying bottoms is almost always a profitable strategy. Of course it's not that simple - you still need specific tactics to make the strategy work - but the odds are in your favor. 

From 0600 to the official market open at 9:30 - it’s dealers choice. News flow, options positioning and front running makes it anybody's guess as to whether we trend or fade and it is wiser to just observe and stand back. Ironically, this is when all of retail flow including yours truly loves to jostle for positioning only to get sideswiped by  violent price extensions or reversals. 

The best bet for trend is 9:30 to 12:30 NY time as specs, institutions and European traders who are wrapping up their day express their views. Trend moves don’t always happen during this time but if they do that your highest chance of trading them. Then just as we settle down to digest our lunches the market tends to digest the price move and we go back to trading range until about 14:30.

During the final hour of the market price will either extend the morning’s move or reverse it altogether - either way trying to fade that part of the day is one of the biggest sucker moves you can make. The one way price action can be relentless and you will be pummeled mercilessly if you are on the wrong side of the move. In fact  if I were to guess, more retail money is lost during the last hour than at any other time of the day. Don’t go mano a mano with institutional money flow. Take a nice walk instead.

The market is a beast and my “spectrum” model is just a rough approximation of the drama that takes place every day, but stepping away from the action does help you see things more objectively so just like in weight lifting, in trading a pause is not only nice, but really necessary.