Thursday, May 26, 2011

Context for Swing Traders

Short term traders - day traders as well as swing should consider the value of context when determining their trading strategies. Context refers to a big picture of the markets, to understand where the analysis of the current time frame fits in the big picture. This includes understanding the big picture in higher time frames, in different markets, as well as in the environment surrounding the markets.

Let us assume that the Nifty has been going down for three days, with the 20 day as well as the 8 day moving average falling. This tells us that the short term trend is down. This is the analysis of the current time frame - the time frame in which we trade. But, we should consider the context in which the analysis is made. Maybe the current down move is only a correction on the weekly chart. Maybe, the U.S. and HongKong markets have started a rally which may influence our markets soon enough. Perhaps, a bullish news event is possible, Inflation numbers may be coming down.

It makes sense to correlate our own analysis with the broader view, and, avoid taking positions when significant disagrrement emerges between different markets and analysis.

I am writing this to explain that short term trading requires a common sense approach. An exclusive focus on the intra day chart is not the optimum way to trade short term.

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