Wait for an "optimum" time, not just an "OK" time to place a trade
By Richard L. Muehlberg*
Posted: Nov 21, 2008
History. Money. Cold blood. Ethics. This article touches on all four.
Fed Chairman Ben Bernanke has one main job: Support the U.S. economy. If a weaker U.S. dollar is good, or at least acceptable, for the economy, his job is to force or allow the dollar to weaken. If a stronger dollar is good, or at least acceptable, his job is to force or allow the dollar to strengthen. On Tuesday, June 3, 2008, Bernanke gave a policy speech in support of a stronger dollar as a way to slow U.S. inflation. One way to protect a currency is to raise domestic interest rates. This raises the rate of return on the currency: A measure of a currency’s desirability. The moment Bernanke spoke in support of the dollar, market participants aggressively bought the dollar and sold the euro (the currency of the European Union). They also sold crude oil. Crude oil is priced in dollars.
On Wednesday, June 4, the dollar stabilized. Crude oil pushed lower. The price of USO, the crude oil exchange-traded fund, tested support at its 6-month bull (+) linear regression mean, a level that was equidistant between two parallel lines connecting its 6-month low and 6-month high.
On Tuesday, June 5, European Central Bank President Jean-Claude Trichet did his job. He spoke in support of the European Union economy; he re-stated his intent to keep EU interest rates high as a way to slow EU inflation. The moment Trichet said the words, market participants aggressively sold the dollar and bought the euro and crude oil. USO rallied off its 6-month mean.
On June 6, the U.S. Labor Department reported that U.S. unemployment hit 5.5%. The report boxed in Bernanke: A weak U.S. economy resisted him in terms of raising rates; a weak dollar resisted him in terms of lowering rates. Trichet was not boxed: He had a relatively free hand on EU rates. The euro and crude oil surged on June 6. Crude oil made the largest one-day move in its history and closed at a record high.
The move in USO dramatically illustrates a lesson about timing for day traders.
Markets explore price. Frequently, in that price exploration, price is exaggerated, sometimes to the downside, sometimes to the upside. Exaggeration is a necessary part of exploration. Consequently, timing is a necessary part of trading. Understanding these ideas is key to being a successful trader.
How many traders lose money consistently? If you are one of them, the answer is "one too many". When you trade, are you impatient, hot-blooded? Do you consistently enter a trade at an "OK" time -- when conditions meet your lowest threshold of acceptability? Or, are you patient, cold-blooded? Do you enter a trade at an "optimum" time -- when conditions meet your highest level of acceptability?
The major markets are volatile enough to produce a steady supply of optimum moments. As a cold-blooded trader, you may trade less frequently than a hot-blooded trader, but you will make more money. Hot-blooded traders often enter a trade too soon and end up mentally exhausted and with a loss. Cold-blooded traders are careful about timing. They are hunters. They have a hunter instinct.
On Wednesday, June 4, crude oil (USO) presented an optimum long-side entry point when it closed neatly on its 6-month linear regression mean. The price was primed to rally. The mean was a set-up. The rally in the euro was a trigger. Crude oil exploded to the up side. Your job as a cold-blooded day trader is to wait for the next optimum time in whatever market you trade. Be a hunter. Look for a target; then, wait for the price to walk into your sights. If the situation presents itself, hold overnight. Crude oil presented an exception on June 4 and 5.
Is it ethical to profit from high prices? You can go in circles on this. Is it ethical to profit from low prices? Is it ethical to profit, period? Some traders may have stood aside, on ethical grounds, as crude oil surged on June 6. A trader risks money in order to trade. The risk balances the ethical question. Trading in cold blood reduces risk. Is it ethical to reduce risk? You can go in circles on this, too. I am not your ethicist. I am a guy writing an article that could help you live longer and wealthier as a trader. First, come to terms with your own issues about impatience and patience. Second, make your own calls on ethical issues.
Postscript: On Monday, June 9, market participants overrode Bernanke. Aggressive sellers drove short-term U.S. interest higher by dumping euro dollars (rates and prices move inversely). The euro and crude oil sold off. The markets, as of this writing (June 10, 2008), continued to be volatile. Traders were playing on each day’s news. As a day trader, I say: Trade each day as it comes. Hold overnight on exception. Make your trades in cold, not hot, blood.
- 6-month linear regression chart for USO, the crude oil ETF on June 6, 2008
- 1-day linear regression chart, NYSE regular trading hours, for USO on June 6, 2008
- 6-month linear regression chart for USO on June 5, 2008
- 1-day linear regression chart, NYSE regular trading hours, for USO on June 5, 2008
NOTE: A 45-degree inclination (or declination) is a common feature of linear regression channels, whether that channel encompasses a 6-month or a 1-day time period. It is also a common feature of price to close on its intraday high (or low), as shown below by USO on June 05 and June 06, 2008.
*Reprinted (and modified) with permission from Richard L. Muehlberg, who uses linear regression channels and intermarket analysis to day trade his own account. He publishes a day trading diary on his website (www.DayTradingWithLinesInTheSky.com). Email: richardmue@yahoo.com .
