Chart of the Day: A Difficult Environment

[dc]O[/dc]ne of the advantages of using properly calibrated bands is that they can show when markets reach emotional price extremes. It should be rather unusual for a market to go from being outside one side of the band to the other, as happened on this 5 minute chart of the S&P today (7/17/12.) When this happens, it is indicative of great uncertainty, impact of a macro event or headline, perhaps lower liquidity, and, overall, a very treacherous environment. The normal expectation after this occurs is usually consolidation (often, a triangle pattern within the range, but that is not what happened this time) until the market finds equilibrium. I have saved a lot of money by avoiding trading in environments like this; consider how you might apply this pattern on your timeframe and in your chosen markets.

AdamHGrimes

Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.