The Bigger Picture

Traders who focus on very short term trends often tend to lose sight of the bigger picture. As a daytrader and short term swing trader I’m constantly kicking myself for missing out on some of the really big moves. It’s sometimes good to stand back and see what the longer time frame traders are doing. I try to choose my time frames to get out of the crowd and the noise. It seems to me that very short term time frames exhibit smooth trends, as do very long term charts. The crowds tend to cluster around the daily charts. The weekly chart can paint a much clearer picture, at times.

Looking at some of the following charts certainly makes a case for going after the bigger move, or at least being aware of the bigger move. I picked a handful of stocks and futures that I know made large moves. I could have just as easily picked many other examples that made little or no movement. These examples were picked with hindsight just to illustrate the point of how big and powerful underlying trends can sometimes be. These examples would not have been easy to spot in real time, prior to their big moves. But these large, directional moves do happen frequently and are worth trying to spot. As short term traders, we sometimes get too focused on the small details and don’t see the bigger picture. Even if we remain trading on a very short time frame, it is still worthwhile to stand back and look at the big picture. It is often telling us something that is more important than the little wiggles we trade everyday. Sometimes when I’m trading very short term time frames, I feel like I’m trying to look at a picture in print in the newspaper with a powerful magnifying glass. All I see are little dots of ink. Those little dots don’t mean anything. I can’t see a picture. But if I put the magnifying glass away and hold the newspaper out a couple feet in front of me, the picture becomes clear and sharp.

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Above is Allegheny Tech. It is displayed here on a weekly chart with the linear regression curve and the standard error bands set with a large lookback period, and smoothed. Once it crossed the regression curve it hardly looked back for several years. The upper error band held support in many instances. If you were doing short term swing trades on the stock during this huge trend you might not have done as well as just holding on.

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Here is Nucor, a stock in the same similar industry. The stock broke the regression curve by a little bit, but the lower error band held nicely.

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Here is the same chart, but with the indicator replaced by Welles Wilder’s Volatility Stop. This indicator works much like his more popular Parabolic Stop, in the sense that it gives a stop and reverse point on one side of the market. When that stop is hit, it flips over to the other side of the market. The difference is that the volatility stop expands and contracts based on the range of the price bars, hence the name “volatility.” I find it useful for finding a place for a crash stop on longer-term charts. In my opinion it is less useful on short-term charts. I have it programmed into TradeStation as described in the book, using a close only stop. It can also be programmed to stop and reverse intra-bar.

The volatility stop also held nicely throughout most of the move. The one area that broke the regression curve in the previous example was stopped out using this technique. Prices formed a bullflag and once it broke out the top, and hit the volatility stop, another leg up occurred. The sensitivity and lookback period can be adjusted on this indicator. I used Wilder’s default settings. Do your own testing and form your own stats before using any indicator.

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Here’s the same chart again, but with a simple dual moving average crossover. In a trending market even moving averages can work. Of course there were a hundred charts for every one like this that, instead of a nice trending move, were choppy and useless for trading with moving averages.

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Here is the Allegheny Tech chart once more. This time I placed a stochastic under the prices. You can see there were many sell divergences that didn’t work out. There were very few instances where the stochastic even went close to oversold. It stayed in overbought territory most of the time. The higher levels of stochastic readings should have been a clue that the trend was strong, and counter trend trades would probably not do too well.

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Here is Titanium Metals showing a little more difficult situation. Notice how the prices hugged the error bands on the left as the market was making a very nice pattern of higher highs and higher lows. The break came suddenly, but not without some warning, as that last high failed to get more than half way up and then rolled over, closing right on the upper error band. The slight downtrend that followed was well defined by the regression curve and error bands. Once the stock broke above the channel it was back to a solid uptrend.

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Here’s the same stock a little later as it finished it’s bull run. It has since pulled back.

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Here’s a chart of Hansen’s Natural. I watched as this rocket ship was taking off. I never bought a share. I couldn’t understand why it was going up. I shouldn’t have had to understand. The chart showed me everything I needed to know.

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Here’s a current runaway, hot stock. Apple had a nice correction and then the uptrend resumed. On the right side of the chart it often looks like a stock cannot go any higher. Charting software always places the high bar in the upper right corner and it always looks like it’s at a top. It’s hard to jump on board. When prices continue up and the chart rescales, it always looks so obvious. On the other hand, trees don’t grow to the moon. Everyone knows a shake out can happen at any moment. I agree. I prefer to wait for pullbacks to enter.

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Here’s a Soybean continuous chart. That upmove was huge.

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Here’s a chart of the Dollar futures continuous contract through one of its worst persistent down moves. It has since traded a little more in a back and forth manner, although still in a downtrend. Notice how in the beginning of 2002 the index made a third attempt at a high, and then failed right on the rounding over regression curve. There is more on this topic on the standard error bands article in the indicators section of this blog.

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Here’s the Comex Silver continuous futures contract.

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The pit traded Sugar futures continuous contract exhibited a lot of sideways movement until it took off to the upside, and then came back down to earth.

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Here is a weekly chart of DryShips. I had never heard of it until someone brought it to my attention, after the big move. I didn’t even bother to put an indicator on this chart. The rounded saucer bottom is very clear. Most any moving average, or any other trend following technique would have gotten you in. I’m quite sure any oscillator would have gotten you out with divergences, just in time for you to miss most of the move.

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Here is DryShips again, this time on a daily chart with the long term standard error bands. Since a picture is worth a thousand words, I’ll let my fingers have a rest. The chart says it all.

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AK Steel was stuck with much less of an upmove than many of the other steel stocks, but it finally caught up to the group. It’s good to know what the group is doing, but it’s another reminder to trade each stock on it’s own chart, independently from the group.

It is difficult to see far into the future. There are too many variables and unknowns. It’s much easier to see a few minutes ahead in time than it is to see a few months ahead. Not much in the way of fundamental developments happen on a minute by minute basis, unless a report is being release or a terrorist attack happens. It is usually pure supply and demand of the moment. If someone gives you the choice of picking up a five dollar bill that’s sitting right at your feet, or the choice of going outside and running down the street for a hundred dollar bill, which would it be? Is there only one five dollar bill to be had, or will another replace the one you just picked up. What about going to another town, across a raging river, across a dangerous part of town, with the promise of a thousand dollar bill? The five-dollar bill is right at your feet. You don’t see any obstacles to prevent you from picking it up. There might be a trap, but you don’t see one. It seems safe and accessible. Or you could go for the hundred-dollar bill, but you don’t know what’s outside and down the street. You could get mugged. It might not be there. You can’t see it. You are just told it is there. There are many more dangers that can confront you if you go for the thousand-dollar bill. There are many more unknowns. You are relying on what other people are telling you, or on the limited amount of research that you can do on your own. You might not make it to where the thousand-dollar bill is supposed to be. There is no right answer for every person to these questions.

Every trader has to decide on the best time frame for his or her own style of trading. Whatever time frame is chosen, it is important to have an eye on the underlying trend that is being driven by fundamental forces.

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