Long, Short, or Out
Every trader must answer the question, “should I be long, short, or out of the market?” Though hind sight is 20/20, entering in to a trade with expectation of being paid is not so easily done. So we do our analysis off of the past and project it into the future for the desired expectations. But when entering a trade, the real question is did we pick the right direction. So what is the right direction?
Markets move up and down all the time. The first thing a trader must do is to figure out how long the trade will last. In other words, If you buy a stock, and expect it to increase 15%, over how long will that take based off your analysis? Short term trends can differ from longer term trends. The current market may be moving lower over the past several days but the market may be in a large bull market. So if shorting a stock, or futures contract, you might be in it for a few hours or days, but it would end up hurting you over a longer period of time. Each trade we make needs to have a “time stamp” on it so that we can determine the trend over the specified time the trade will last.
So how do we identify trends? The easiest way is to see how the market is trading based off the open. Where is the current market trading based of the year open? Then look at the month open, then the week open, and the day open. If you want a smaller time period, go to 30 minute bar opens. If the market is above the year, month, and week opens, we are in a strong uptrend. However, the market may be below the day open. So we have a down day in an up market. This would be an out day, but looking for the overall trend to continue to the long side on a bigger picture. However, you may be looking short for a day trade, or staying out because the trend is not strong enough. When signals are mixed, it is best to sit on the sidelines and wait for the picture to become clear, and when all signals line up, then enter into the market.
Look at the trend, and then look at the trade horizon. Does the analysis and match the trend over the specified time? If anything, you can eliminate a choice. You may be looking long, but staying out, which eliminates being short. Making a choice between two is easier than three. Stay with the trend, answer the question, and good luck trading.