How Elastic Are Your Trade Indicators?
Jan 6th, 2009 | By Rick Pendergraft | Category: Financial NewsThank goodness it is 2009. The fourth quarter was crazy for the market. The wild swings and incredible volatility were maddening. Most investors don’t want to be reminded of how bad the market was in 2008, but the reminders were apparent in their monthly statements. The good news is that it is over.
But there is a lesson to be learned from every rough patch. One of the lessons I learned from the crazy market of the fourth quarter has to do with the elasticity of indicators.
What I mean by “elasticity” is that a number of indicators are calculated based off the most recent trading activity, including most of the overbought/ oversold indicators. In the fourth quarter, these indicators were stretched out like an elastic waistband thanks to big moves in both directions.
For example, if you use the Relative Strength Index as one of your indicators, the RSI uses volume and price change in its calculations. Whena stock goes up four or five percent two days in a row and then drops four or five percent the next day, the RSI is getting stretched out. When the market calms down and that same stock is moving less than one percent per day, the overbought and oversold levels are harder to reach because the RSI is stretched out from the four and five percent moves. These changes to the RSI lead to fewer trading signals.
I know personally that I cut back on my trading because I wasn’t getting as many signals as I was a few months ago. With my mini futures trading for the Velocity Strategy, I went from getting six or seven trade signals per month to only three or four. Now that the market is settling down, the indicators are starting to tighten back up, and the signals are becoming more frequent again.
I have said it numerous times in IDE, but it is worth repeating. You don’t want to be trading for the sake of trading. You want quality trades, not quantity. When the indicators get stretched out like they were in the fourth quarter, you have to have the discipline to step back and wait. Sometimes the waiting is the hardest part of being a disciplined trader, but it is also one of the most important traits.
Discipline and patience are always important traits, but they are even more important in a market like the one we have seen for the past year.
Source: How Elastic Are Your Trade Indicators?
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Rick is currently the Editor-in-Chief of The ETF Options Trader and the Triple Wave Investor. At the age of 23, on the third options trade he had ever placed, Rick turned $1,800 into $22,000 in less than a week, when the company he bought became the target of a takeover. He admits it was a stroke of luck, but it was a memorable education as to the leverage that options can provide. He lives near Delray Beach, FL with his wife and three children.
