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Is the Time Right?


Identifying your time frame helps you to set your strategy upfront and adhere to your discipline approach laid out before entering a trade...

As a trader or investor one of the most important areas to understand and identify is time frames. Just as important as it is to understand your time frames because of the trading style you gravitate towards, it is also crucial to understand your time frame due to the environment you find yourself in.

The former is an exercise in self reflection and understanding if you are more of a day trader, swing trader or longer term investor, while the latter is properly identifying the environment you are in and adjusting accordingly.

Identifying your time frame helps you to set your strategy upfront and adhere to your discipline approach laid out before entering a trade rather than scrambling afterwards when the action becomes dicey. When I bought my son shares of Dream Works Animation (DWA) to physically hang on his bedroom wall, my time frame was many years without regard to gyrations in between, but when I shorted Continental Airlines (CAL) last week as they were approaching support, I desired to make a quick few points and reverse my position if the trade went against me by more than 5%. Understanding these time frames from the onset helped me to manage the trade with as little emotion as possible.

It is quite clear that all financial markets have been trending higher since the bottom in 2002 and now can be defined as possibly changing directions. Unfortunately, I'm not 100% sure if this recent drop is the start of a true "bear market" or a nasty "bull market rinse", doing a fine job of not only rinsing out weak hands but raising the definition of weak to anyone who can't hang with the winner of a strong man competition.

Since I am one who typically subscribes to the thesis "when in doubt, sit it out" I also can't shake that entrepreneurial side of me that wants to capitalize on opportunities even if I see them as short term in nature. So for the purpose of this piece I'll alter "when in doubt, sit it out" to "When the trend may be out of sort, by all means keep that time frame short".

Some of the greatest bounce activity happens during a steep slide as aggressive traders continue to press shorts and finally start booking some gains when they have taken all they can. We saw this yesterday with an impressive 300+ reversal on the DJIA as well as select financial stocks such as Bear Stearns (BSC) or Goldman Sachs (GS) that not only reversed off day lows, but added healthy gains as well. While this action may or may not continue, the important thing to keep in mind is your time frame should you desire to wade in and play it.

Regardless of the opinions that will float around, the fact remains the market is experiencing a medium term downtrend defined by a series of lower highs and lower lows. Until this changes, it is incredibly important to understand that as a long side trader, the current trend is not your friend and one must keep the time frame short to keep all fingers and toes firmly attached.

If you do not have the luxury to monitor short term positions and therefore cannot subscribe to a short term thesis, the current market environment remains questionable and using strength in order to lighten up on any positions you have left may be a good idea. Once you see a true bottom set in, you will have ample opportunity to redeploy capital and participate in the upside.

Go get 'em today.
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