Tuesday, September 27, 2011

Trade this? No way!

The sharp intra-day and short term movements in recent weeks has been very reminiscent of 2008. We are currently in a wide ranging congestion pattern, as can be clearly seen in this chart of the Dow:

The 2ATR measurement is way higher than in previous months, confirming the volatility you would have to deal with if you are trading the indices. At some point, there will be another breakout - in which direction is anyone's guess. These non-trending phases, combined with high volatility, are the absolute worst market conditions for trend followers. There are a lot of trade entries I deliberately do not take, dependent on the 2ATR and Volatility Factor readings. On these trades, stop placements have to be further away from current market prices, eroding the potential reward:risk ratio. Within the scan results that I get presented with, I will almost always look for a trade that offers the best R:R potential. Opening a position on the Dow, should an entry signal be given, would not be a consideration for me at this time.

The ebb and flow predominant at the moment will soon sort itself out, one way or another. Trying to predict in what direction that will be is anyone's guess. In the meantime, I would give charts like this a very wide berth.

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