Trading Prep for the New Year

It is that time of year to set goals and renew resolutions that were neglected or ignored in 2018. When the year-end holidays roll around, I make it a point to update a statistical cheat sheet and charts that include current and historic dimensions for commodity futures, stocks and ETFs. Comparing historic and current ranges will help identify when a market has moved too far, too fast, thus favoring a consolidation phase. This is commonly known as overbought or oversold. Or these stats may signal when a market is wound too tight making it ripe to trend or move vertically either up or down.

The other dimension I like to track is time at price. This horizontal measurement is a proxy for volume at price. The more time spent at a price, the more volume accumulates. This dimension displays the price where buyers and sellers transact most often. It is the fair or high-volume price, and it is used to determine whether a market is ready to break out into a trend.  And it can be used to determine if bulls or bears are in control of momentum.

The macrograph below illustrates SPY (S&P ETF) price action over the past year using monthly “bell curves.” Under each profile there are two numbers, the top is the horizontal dimension or TAP (time at price). When that number exceeds the average, odds favor a vertical move or trend to begin. This is especially likely when the range (vertical dimension) is below average as well. Note that in Dec 2017 and Sep 2018 the ranges were well below the norm and TAP was above average and extraordinary moves soon followed. This combination frequently precedes breakouts or large vertical moves.

To be a better trader, preparation is key. When it is time to execute a trade to be long or short either price and/or premium, you may time your trades better if you have the stats to back your decision. Great traders have great timing, and great timing increases profit potential while reducing risk. Using vertical and horizontal measurements as part of your analysis is an essential component for creating strategies.

John Seguin, Market Mentor Mentoring

Trader Education