By Jeff Wilson Over the past couple months, the markets stalled out and spent a good deal of time within a tradeable range. During this time of indecision, I was able to speak with many traders about their stock market strategy and overall position management. Some of the more common themes that emanated from these conversations were fundamental analysis (FA) versus Technical Analysis (chart levels), and the difficulty in sticking to trading time frames. The latter really refers to turning trades with an original thesis of being short-term in duration (intraday, 2-4 day swing, etc) into “investments”… or longer-term, actively managed positions. One of the main justifications is how fundamentally sound the company is (revenue, eps, margins, etc). As a retail trader and proactive investor, I can relate to the flaws that are involved with this line of thinking and would like to share a few thoughts on sticking to your trade thesis and trading time frames. I believe your trading P & L will look much better if you avoid these types of psychological traps.
I have an economics background and the toughest challenge I had when I left my job and decided to trade full time is properly positioning for my macro thesis. What I mean by this is if I feel that the macroeconomic environment doesn’t support the levels of where the market is trading, I shouldn’t expect my thesis (if my thesis is even correct: A VERY BIG IF) to unfold within 30 days. I would wager this $5 bill in my pocket that some traders who saw the market crash coming in 2008-2009 from 2-3 years prior lost money trying to pick the top. While their thesis was correct, their timing was a bit off. As the saying goes, the market can stay irrational longer than you can stay solvent (Keynes).
This all points to trading time frames being one of the most important components of active investing. Some traders like to quote how Company A is cheap based on a whole bunch of ratios yet they trade it using a 5 minute chart. “Well, this company has very good fundamentals. I think I will enter long looking for 1-2% upside target, risking 0.5% to the downside on a intraday trade.” From a risk to reward perspective, it passes. However, unless there is a company specific binary event (sales figures, earnings, FDA announcements, etc) on the horizon which affects the company’s financial health, the fact that the company is fundamentally sound is irrelevant for a trade where the trader is looking for quick action. Similarly, active investors often stick with losing trades (shoving stops to the sidelines) if the company has good fundamentals. While you may ultimately be vindicated 3 months from now, you will likely have to a) see a bigger drawdown on your trading portfolio and b) allocate time to managing that trade.
I consider trading time frames a risk management aspect as they affect position size, stops, and ultimately your P & L. As a short-term trader, position sizing and stop placement are two of the most important risk management tools you have.
In addition, if you are following trades from other traders either through tweets or paid services, get to know their trading time frames. Are they looking for a quick scalp or looking for a 25% return? Remember that while Trader A who owns Stock A currently trading at $100 may see it going to $150 (50% upside move), while Trader B may see it going down to $90 first. While both traders may ultimately be correct, those trading in the interim may get some whiplash.
So trade your time frames and know which information is relevant or not to your overall trading thesis. Yes, trading time frames do matter. Thanks for reading.
Twitter: @cerebraltrades and @seeitmarket
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
