Adapting To The Market’s Truthful Clock

The previous post illustrated why trading is challenging, equally markets alter their volume, volatility, in addition to trendiness–sometimes quite radically.  On Friday, for example, SPY traded amongst a truthful make of over 3%, iii times the average daily truthful make of the previous twenty trading sessions.  Volume expanded to over 345 1000000 shares, likewise iii times the average book of the prior twenty sessions.  Friday’s pure volatility (volatility per unit of measurement of volume) rose to twice the grade nosotros had averaged since April–meaning that, non alone were nosotros getting to a greater extent than book coming into the market, but the book was creating twice the previous movement.

Above nosotros encounter a nautical chart of ES toll displace for 8/20/15 in addition to 8/21/15, where each information shout for is a closing toll later 500 toll changes (ticks).  We had 139 toll alter bars for the solar daytime Friday.  By contrast, in that location were 39 bars for the prior Friday.  If nosotros facial expression at fourth dimension equally the market’s clock, in addition to thus every solar daytime is similar every other one.  Once nosotros stance displace equally the market’s clock (see this fantabulous paper), in addition to thus every solar daytime tin live on quite dissimilar in addition to offering really dissimilar chance sets. 

The oscillator (red line) is a five-period charge per unit of measurement of alter mensurate that acts equally a short-term overbought/oversold measure.  Because nosotros impress to a greater extent than bars when the market’s clock speeds up, nosotros encounter to a greater extent than overbought/oversold oscillations.  That could exercise to a greater extent than opportunity; likewise to a greater extent than frustration in addition to confusion.  The challenge is that, using fourth dimension equally their gauge, almost traders neglect to check the market’s clock: they are similar dancers on a trip the calorie-free fantastic flooring who perish along ho-hum dancing in 1 trial the melody turns to dubstep.  Conversely, when traders are calibrated faster than the market’s pace, they overtrade, expecting to a greater extent than upward in addition to downwards displace than the marketplace position affords.

Imagine playing basketball game when the shot clock randomly changes from 24 seconds to 48 seconds, in addition to thus to 12 seconds, in addition to and thus dorsum to 24.  A squad that had 1 agency of running plays–and 1 fourth dimension calibration–would inevitably play suboptimally.The market’s shot clock changes over time, but thus oftentimes nosotros don’t.

It’s but roughly other event of the simple-mindedness behind the advice that traders should “follow their process.”  If y’all accept *a* process, you’ll perish piece of employment over when markets change.  It’s meta-processes–sets of rules for engaging inward dissimilar processes–that let 1 to arrange to ever-changing markets.  From the perspective of meta-process, creativity–not slavish adherence to 1 agency of doing things–is an essential portion of effective discipline.

Further Reading:  Trading inward Event Time
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