Traders Roundtable: Assessing the Market Condition
A friend of mine asked an important question about how to assess the condition of the market based on the length of time you intend to hold your typical trade. The challenge is to balance precision and usefulness, and to get the market condition system timing in tune with your trading style.
My sense is that a 200 or 100 day look back period is about right for a market condition “framework” for swing and position trading.
Similarly, I believe a 10 day lookback is a good framework for intraday and overnight trading.
This leads me to believe that 10:1 is about right when you begin assessing the market for any given trading system. It will need to be explored and analyzed but it should get you into the ballpark.
I use +/- 2% band around the 200 day moving average as the threshhold for a “Sideways” market. If price is better, it is a Bull market, and if price is worse, then it is a Bear market. This simple heuristic has been very effective in helping navigate through what is being called the “Lost Decade” of investing.
I strongly recommend you start with plotting the 30 day System Quality Number (SQN) of the instrument you are tracking, with a 10 day average of SQN on a chart that looks back a year or 6 months and compare that to price action in the same time to get a sense of how useful SQN may be for your targets. I think you will see something very useful.
Microsoft Excel lets you automate the building of charts, and fetching the price data needed to calculate the SQN.
I use the 200 day moving average idea for intermediate term trading and I use the 30 day regression line slope and the 10d Williams%R to frame my awareness of short term market conditions. This gives similar insights to the SQN and is a little bit easier to explain.