The Compression of Time: A Significant Factor in Trading

This is not your grandmother’s market. There was a time when economic and political events were absorbed by the markets with considerably less reaction and fanfare and indeed with considerably less anticipation. Investors and traders had more time to reflect upon and evaluate the news and the fundamentals before taking action. However, in our seemingly never ending race for instant everything virtually every morsel of market related data evokes an immediate and all too often exaggerated response. But why?

Clearly the situation has been nurtured on a diet consisting of several factors and forces among which are the following:

1. Speed of information dissemination has been taken to a matter of seconds allowing traders the world over to react quickly.
2. The cost of trading has been lowered to a level that astute and nimble traders can make money on very small move.
3. The ability to have orders filled electronically within one or two seconds allows traders to enter and exit trades with lightning speed in order to take advantage of market reactions to news.
4. There are more players than ever. This provides liquidity to the system and expands the game which, in turn, attracts more traders.
5. Professional money managers control record levels of speculative equity that demands performance. As such virtually all market moves no matter how small are considered opportunities for profit.
6. Traders all over the world are afraid they’ll “miss the bottom” of the market. Virtually every “green shoot” in economic data attracts a rush of buying whereas almost every negative item prompts profit-taking or panic selling.
7. Decimalization in stocks (i.e. the change from quoting stock prices in cents as opposed to fractions) has created more opportunities to profit from large positions on very small moves.
8. The rapid growth of computerized quantitative trading models has created a plethora of automatic trading programs that buy and sell on very small market moves and finally.
9. The globalization of stock and commodity markets has created numerous opportunities for arbitrage as traders take advantage of brief disparities between markets in different parts of the world.

Put all of this together and you get the necessary ingredients for market reactions that are more severe, more immediate, more volatile, more dangerous and seemingly more promising than ever. Market moves that once took two or three years to develop are now taking place in a matter of days. At times these moves develop over a matter of minutes. There has been a paradigm shift in the trading world. The compression of time and price has affected or perhaps infected many traders, many trading systems and many timing indicators. And this has created opportunity as well as risk.

While the compression of time and price appears to have created more opportunities for short term swing trades than ever before I advise you not to get seduced by the appearance of opportunity since it may well prove to be a Trojan horse. The simple fact is that many of the very short term moves we are witnessing today are so volatile, so fast and so fraught with risk that the conventional logic, wisdom and market methods are not equipped to take advantage of them. Nor, for that matter, are the psychological or behavior traits of traders sufficiently honed to profit from them. This is a classic case of how technology creates opportunities that humans are not able, as yet, to maximize. Another example on a different level is the growth of genetic engineering and biotechnology.

While there is vast promise in the new technology there are also social, ethical, legal, moral and scientific issues which have yet to be resolved. Here are some suggestions as to how you may use the compression of market time to your advantage and/or how you can protect yourself from the dangers that have been created by this situation:

1. Expect more not less. In other words, if your trading method provides a particular support or resistance level then you might reasonably expect that prices will move lower or higher than that level simply due to volatility.
2. Use LARGER STOPS not smaller stops. When volatility is high and large moves occur during compressed time frames you need to risk more if you want to make more.
3. Don’t try to be a brain surgeon with a magnifying glass, rather be an astronomer with a telescope and sit back from the situation – look at the markets from a distance and not from the minor perspective. Think of the market as a work of expressionist art. If you stand too close you’ll only see dots. If you stand farther back you’ll see the real picture.
4. Don’t panic with the crowd. In other words just because you see a big move happening don’t feel as if you have missed something by not being in on the move.
5. Remember that you won’t get all the big moves. Many of them simply cannot be gotten other than by inside information or luck. One of these is illegal and one of these is ephemeral.
6. Expect over reactions as the new standard. Think of short term trading as the new intermediate term trading and think of long term trading as a thing of the past.
7. Be a contrarian. Now more than ever before professional traders are taking advantage of the uninformed sucker, the undisciplined tyro who reacts with emotion to good news and bad news. You are best advised to be a contrarian. When the news is bad and you see large price declines begin looking for lows. When the news is good and prices move violently higher begin looking for a top.
8. Be very careful of what the television “experts” are telling you. Some of them have paid to be on the air so they can promote their ideas. Some of them have positions they want to unload. Some of them don’t even trade. And some of them aren’t experts at all. Furthermore, unless someone can give you a recommendation that is accompanied by a stop and at least a first target then the odds are you won’t make money with their suggestions.
9. The plethora of advice that’s available by Internet and the broadcast media adds to the noise and the noise creates volatility. The volatility usually doesn’t work for you unless you look at the opposite side of the trade.

Conclusion: The markets are not only more volatile than ever, but the moves are developing in compressed time frames. Trading in these markets requires more skill than ever before and it also requires larger stop losses than ever. Unless you have the trading skills, the financial ability and the psychological ability to trade the markets then you better get them or you’ll be grist for the mill. Your money will buy me and other professional traders a new house, a new car and new boat and lots of other goodies. So take my advice and use time – price compression to your advantage by following the suggestions and the advice I have given you above.

It’s no secret that the price moves have been huge. It’s also no secret that many moves have developed in a matter of minutes or even seconds. And there are more instance of this volatility every day. Here, for example is one that happened this week in the stock AVAV over the course of one hour.

Our 37 Year Anniversary

I am pleased to announce that on 15 May we celebrate our 37th year of publication. My personal experience in the markets dates back to July of 1968. During these years I have seen many traders come and go, many newsletters come and go, and many gurus come and go. But we are still here and we still have a loyal and consistent following. It has been a most fantastic and rewarding ride for me in many respects – financially, personally, intellectually and more. I have enclosed an announcement on my 37 Year Anniversary Sale. The savings are outstanding but they won’t be offered for long. Take advantage of them. They are truly excellent.

Jake Bernstein