How Active Traders Time the Market

  • Posted by on May 3rd, 2016 at 12:16 pm

If you are an active trader, you probably follow a method that tells you when to be aggressive on the long side, when to lean on the short side, when to cut position size and mostly stay out because of market’s choppiness. I use a simple short-term trend following approach. Nothing sophisticated. It doesn’t catch market’s tops and bottoms (I have developed other methods for those), but it keeps me out of trouble and it tells me when to push the gas pedal, long or short, and in which industries. It tells me when I should be buying breakouts and pullbacks in strong stocks, when I should be shorting weakness, when I should go after mean-reversion setups and when I should mainly stay on the sidelines.

The approach is based on the relations between price, 10 and 20-day moving average. When P>10MA>20MA, we have a confirmed uptrend. When P<10MA<20MA, we have a confirmed downtrend. Anything else is a consolidation and therefore choppiness. It’s color-coded and it’s updated in real-time. Here’s a snapshot of the current situation: tech-related sectors have been in a downtrend for a few days already. Gold miners have been in an uptrend since April 5th – they hit overbought RSI reading on Friday. Basic Materials and Energy were in an uptrend until yesterday – they hit overbought RSI conditions early last week.

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The color codes don’t tell you when a sector or an index ETF is extended, but you could add a 14-day RSI reading for overbought and oversold conditions or look at the specific sector chart.

This timing method is for swing traders only. The purpose of swing trading is to catch quick 5% to 30% moves in 3 to 10 trading days. If you are longer-term position trader, whose goal is to capture multi-week and even multi-month moves, you will need to expand your horizon and probably use longer-time moving averages to create a similar market timing approach.

What I described above is a top-down approach to the market. I trade mainly individual stocks and ETFs and l look at a few momentum screens to generate trading ideas and to get a bottom-up perspective of what’s going on in the market. A bottom-up approach provides a better perspective of the currently hot industries. Both, a bottom-up and top-down approaches have their place in each active trader’s arsenal. Once you set them up, it’ll take less than 10 min of work to go through them every day and you will know when to be on the long side when to be on the short side and in what industries, and when to sit on the sidelines (go on vacation).

Both, a bottom-up and top-down approaches have their place in each active trader’s arsenal. Once you set them up, it’ll take less than 10 min of work to go through them every day and you will know when to be on the long side when to be on the short side and in what industries, and when to sit on the sidelines (go on vacation).


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