My primary target for trading is to select trends in which there is a large time window to exit at a profit. That means that I review the data to select a trade that has specific data that I can use to support an expectation that the trade will be profitable whether I exit in two months or in two hours.
The two pieces of information that I look at with greatest interest are “sentiment data” for that market and overall momentum. Momentum includes the obvious momentum of price changes (accelerating or decelerating of a trend- as shown below) as well as the “breadth” data that shows how much uniformity there is within that type of investment, like parallel movements in a bunch of similar markets (as in the “breadth” of stock prices / stock sectors that are moving together). For that “secondary” momentum data, I review things like VIX, the TRIN measurements, and High/Low ratios (which I am not detailing here).
Let’s start very simple. When there is a clear fluctuation in momentum, that is ideal. I trade in to rising momentum (buying) and exit when momentum is flattening (or when prices reverse and cut in to prior gains). In the first example below, there is a rise of momentum followed by a clear “plateauing” of the price.
Ideally, I want to observe a nice smooth curve something like a wave (or a parabola):
Here is an actual example of a market that I am watching closely now, along with some analysis (of what is interesting to me about the price changes) in the images below. Before you scroll down and see my comments, what do you notice about the shape of this chart?
That chart above shows the prices over time of a fund called ZSL (which is basically the inverse of this fund shown below that tracks the price of silver in US Dollars, showing 6 months of prices). What do you notice about this very similar chart:
None of that information above guarantees what will happen next, but there is a clear shift from strong downward momentum (prior to October) and then a potential for a continuing uptrend (an increase in the slope or angle of the green line).
[update on 1/21: here is what happened next in that market. The market did have a surge of momentum, resulting in a quick profits to the positions that I took for an upward surge.]
Here is an even simpler example:
All we are looking for in these charts (at this point) is any smooth change in curvature (momentum) of a trend. Using that very obvious information as well as non-price data (such as sentiment ratios and all the other ratios mentioned in the beginning), I can identify positions that I am comfortable holding for months, but that I am also willing to exit at a profit just as quickly as there is a decrease in momentum. Plus, when the trend is still “young,” I can exit on any profit whatsoever.
The most convenient thing is this: if I happen to miss any particular “exit signal,” I can be confident (as long as all the ratios are in favor of the original trade) that I will have another opportunity to exit at a profit soon (in the next hour, next week, etc). This situation allows for trading to be done with increased comfort and ease rather than consistently high stress levels. I can focus less on exactly when to exit and more on when is it “safe” to enter a position.
One downside to this method is that any particular position can take months to make a decent profit. This strategy does not exclude any others, so it is an excellent foundation for any other methods (such as very short-term daytrading) which may be relevant in certain unusual market conditions.
Above is a final example, showing the cumulative sock prices of 500 biggest companies in the US. Notice that in November (highlighted below), the rally continued to make new highs, but with declining momentum.
As of January 15th, the last day shown, prices have returned to their lows from earlier this month. If prices immediately break the low of the prior month (December 2014), then the momentum of the drop could accelerate quickly.
Considering that global investors were stunned earlier today by a change of policy relating to the Swiss currency, there could be an avalanche (or balloon) of activity in a variety of markets in the coming days. Perhaps there will be a temporary relaxing of certain pressures due to that political change. However, there are also a lot of latent presumptions that have been revealed today as currently inaccurate (because of the policy changes in Switzerland). There are a lot of underlying pressures that could “unwind” all at once in the coming days and months.
Those who are motivated enough about finances to benefit from competent research may be greatly rewarded for their diligence. The multitudes who are less motivated and less cautious are, quite naturally, the inevitable source of the rewards that will flow toward investors who are diligent and disciplined (or who partner with traders and account managers who are diligent and disciplined).