Price vs Time Sensitivity

The motivation to buy or sell, to put on a position or to close a position depends on the trader putting in the order.  In general, traders are more urgent when closing out positions than when putting on positions.  That is why stocks often go down much faster than they go up.  You have those that are urgent and those that are patient.  The path of least resistance is usually directly proportional to the urgency of that side of the trade.  Every trade has to have a buyer and a seller.  If the buyers are more urgent, the price will likely rise.  If the sellers are more urgent, the price will likely fall.  This is common sense but it's often lost in the weeds of trying to find out why something is moving, what news came out, etc.

Opportunities arise when you have a lot of capital in the market that is time sensitive.  This is often times fast money, fund inflows/outflows, or those getting margin calls or having to sell to reduce risk.  That is when the market is the most inefficient.  You see this time sensitivity a lot in high volatility markets, because a lot of fund flows and hedge fund de-risking/re-risking is occurring.

It also occurs around key events that people worry about, like Brexit vote or the US presidential election.  Around those big events, you see a lot of time sensitive urgent trading going on, which is where the seasoned winning trader will step in and take advantage of the opportunity.  But in order to not get shaken out during the short term volatility, trade size has to be reasonable.  Too small and you don't make much.  Too big and you risk getting shaken out if the timing is a bit off.  Then, you become a time sensitive trader yourself, being forced to cut a position due to losses.  That is the worst of all worlds.  Knowing that your trade will go in your direction within a few days, but not being able to withstand the storm and having to reduce or close out the position for a loss, at probably the worst possible time.

Price sensitive traders are the fishermen.  They are patient, they go to the right spots, and just wait for the fish to bite.  The fish are usually the time sensitive traders.  The right spots, or markets, are the ones where the most stress/volatility is occurring.  As I have said before, traders under pressure and facing losses act with more urgency than those with comfortable gains.  That is why you get higher volatility (more opportunity) in down markets than up markets.

Interestingly, that is not the case for the commodities markets.  In commodities, bull markets usually have higher volatility than bear markets.  { That is because most commodities end users have a low price elasticity and will have to buy the same amount, whether the price is high or low.  The marginal buyer has to buy at a much higher price during a shortage, but doesn't have to buy at a much lower price during a surplus, because most commodities can be stored for years, and opportunistic buyers who are price sensitive will buy a commodity and put it into storage to sell later, creating a value floor.   Thus you get the asymmetric tail risk towards the upside, not the downside like in stocks. }

You DON'T want to the be the guy who has to trade today.  This hour.  This minute.  It usually leads to bad prices and entries.  The best prices to enter usually have a small time window.  Stocks don't often linger at the bottom waiting for traders to accumulate, and then burst higher.  They usually go down, find a V bottom, and quickly go back up.

There is a fine line between trading too much and trading too little.  You can set a threshold for a trade so that you take all 60/40 (60% winner/40% loser) trades or better, but a lot of those 60/40 trades prevent you from taking advantage of 80/20 trades.  For example, let's say I want to buy SPX on a dip to 2250 within the next 5 days.  If that is a 60/40 trade, waiting for a dip to 2230 within the next 5 days could be a 80/20 trade.  So if you take the 60/40 trade and buy at 2250, you prevent yourself from buying at 2230, unless you want to double down and add to the position.  But that has a notable downside.  It gives you a position sizing profile of having your largest positions be the ones that start out the worst.

But if you are too patient and only wait for 80/20 trades, then you are passing on a lot of good (51/49 to 79/21 trades), but not great opportunities.  Positive expected value (EV) trades that pass by without any money being made on them.  That can demoralize the psyche, especially if one is a full time trader.  But that may be the payoff a trader has to make in order to avoid overtrading and putting oneself in the line of fire day after day, with marginally positive EV trades.  Those are the type of trades that get traders in trouble, stuck with a loss, unable to cut the loss, and then having the loss get so big that it leads to forced selling at horrible prices.

Next time you trade, try to figure out if you are overtrading, trying to catch a lot of minor moves, and rushing your entry.  Or if you are being too patient and letting too many good trades pass you by.

We are a getting a gap down to start the week, after what I believe was a false breakout last week.  The market got overly excited last week with Trump's first week in office, where he looked busy, and promised massive tax cuts and infrastructure spending.  As this past weekend has shown, Trump talks a good game, but can he execute a good game?  So far, he's had to roll back a few of his haphazard executive orders.  The road to lower taxes and more infrastructure spending is not going to be as easy as people thought.  Trump really doesn't know how to operate in Washington.  There is a give and take to the process, not just take and take.  Missed the short last week, being too patient.  But it wasn't that great of a shorting opportunity so I don't mind.