It's All Greek to Me
It's All Greek to Me
It seems almost on a daily basis there are news flashes having to do with the state of affairs in Greece. Will they default on the mountain of debt that's caused them to implement severe austerity measures? And if they indeed cannot make their loan payments, what are the ramifications for the global economy? Will the ECB (European Central Bank), or the Germans, bail them out much like the US Central Bank did with our large financial institutions back in 2008? In addition to Greece, the problems throughout the European Union and the slacking US economy are constantly being reported in all the major financial networks fueling the day-by-day gyrations of the financial markets.
All this upheaval makes good headlines and sells a lot of newspapers (yes, these are still in existence) and they do impact the markets in the near term. However, for many traders, the constant barrage of news is more of a distraction than anything else.
Quite frankly, I don't understand all of the intricacies or mechanics that central banks go through in times of turmoil. Nor do I feel compelled to find out what they actually do as it has no bearing on improving my trading results. Knowing what the FOMC or the ECB do can make you sound smart and make for great conversation at your next dinner party, but it really has no place in devising a viable trading strategy.
In terms of the market, during periods of uncertainty, volatility increases and certain patterns develop. These are generally range-bound environments that can be traded quite effectively if you understand them. Typically, when the veil of uncertainty is lifted, that's when breakouts occurs, as all of the "fence sitters" finally get off their hands and are forced to take action. This "breakout" will usually set in motion a more sustainable move.
This chart of the ES (E-mini S&P) clearly illustrates the range type pattern that has been ongoing for the last 6 weeks.
Figure 1
Within this range, however, there are supply and demand levels that form in the short-term, providing low risk opportunities. In addition, we can also use the top and bottom of the range to gauge whether we want to pursue longs or shorts in an aggressive manner.
In the 60-minute chart of ES (shown below), we can more clearly define the range, and more importantly, the quality supply and demand levels. Unfortunately, everything between those levels is equivalent to "No man's land" because it's very hard to gauge risk and reward in between where supply and demand is most out-of-balance.
Figure 2
One trap in this type of environment is that when the S&P eventually moves away from the trading range, it will inevitably have some false breakouts. These are characterized by price piercing the upper or lower boundaries of the range, and quickly returning back into the range. For those traders that employ this method, this can sometimes be very frustrating, not to mention costly.
A lower risk strategy in this scenario would be to wait for clear evidence that either the buying or selling that was preventing price from moving beyond the range is fully absorbed. Once this occurs, we enter on the first retracement to the point where the break originated.
That would look like the chart below:
Figure 3
In summary: The current environment is fraught with headlines that can move the market violently and keep it trading in a range. For some traders, this is a very tough environment, but for the folks that have rules, keep it simple, and have self-restraint, it can be quite rewarding. So, the next time you're asked about your thoughts on what's going on in Europe, or the current state of the economy in the US, you might reply: "That stuff is all Greek to me; all I try to do is follow a simple plan that entails keeping my risk low, and my profits high." And that is the essence of good trading.
- Gabe Velazquez
"
About Gabe Velazquez
Gabe got his start in the markets as a broker trainee for Paine Webber, a mere 3 months before the market crash of 1987. That experience brought to light the importance risk management plays in trading and investing. In fact, it's greatly influenced the way he trades today. He spent 15 years as a stock and commodities broker, conducting technical analysis seminars through-out Southern California. After many years of managing other people's money, Gabe now concentrates full time on trading his own portfolio and teaching. He currently holds a series 7, 63, 9 and 10 (securities and options principals license.)
View Gabe Velazquez's post archive >
