I received this question from a trader named Dennis.
I am getting started in trading and undecided what time frame. This is because I have seen the markets move up to get the herd in and then the rug pulled from under them trapping them and causing panic selling. My question is how do you forsee this event when the institutions decide to sell or buy?
Unless you know the decision-making process of an institution, then you really can’t forsee with any consistency when they are going to be in the market. Institutions are no different than individual traders in as much as they have a wide array of approaches to their trading and investing actions. Some are purely technical. Some are purely fundamental. Some combine the two. Some are algorithmic.
They also operate in a number of different timeframes. Some play in the short-term while others operate in much longer timescales.
The type of activity you have described happens in all timeframes. Short-term traders are just as prone to herd trading as longer-term ones. It’s a simple reality of the financial markets and the greed/fear cycle that is always in action.
The bottom line is you need to pick a timeframe based on your particular needs. Make sure to select one that you can consistently operate in, not one that will be hit or miss because of the demands of your schedule. This is important because consistent participation in a certain timeframe will mean you get better at understanding the types of moves that happen in that timeframe. That includes understanding when the market is getting extreme in the manner your mention, thus putting you in a better position to trade that kind of activity effectively.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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