When Is a Market Move too Quick?

For an independent short-term or swing trader, timing is crucial. There are patterns that frequently precede trends and increase the odds for vertical or directional moves. On the other hand, there are also situations or setups that occur when a market is apt to go through a holding pattern or period of consolidation.

Measure price action using vertical and horizontal dimensions. These stats allow a trader to distinguish if a market has moved too far and too fast, thus favoring a short volatility strategy, or whether it is likely to trend or move directionally, thus favoring a long option tactic. Identifying when a trend is about to start or end is how we get probability in our favor. 

Let’s assume a market moves too fast and is considered overbought/oversold. We need to determine what is too quick. When a move is too fast it is tough to make money on directional plays, but it is often an opportunity to make money using a short volatility wager.

To determine if the move is too fast, use ATR, or Average True Range. Know the expected range for a given time frame. When ATR exceeds the norm by 150%, a period of consolidation or short volatility wagers should pay.

Conversely, a trend bet or directional play should pay when the opposite occurs. If day ranges are below the normal ATR and there are three or four days of overlapping prices, a trend or directional wager should pay off.

Markets move from balance to imbalance. It is our job to recognize when we should wager on a trend trade or counter trend trade. Track speed of movement and time at price and you’ll have a good start on getting odds in your favor and timing trends.

John Seguin, Market Taker Mentoring

Trader Education