To become a successful stock market trader, it helps first to understand the way the various stock market identities or trader timeframes coexist, intersect, and interact. To establish a foundation for this understanding, we must first define the different market identities and timeframes, as well as the general motivations of each.
The scalper lives by the minute hand, continually buying and selling in order to take advantage of fleeting discrepancies in order flow. Stock Market Scalpers may make as many as several hundred trades a day, comprising thousands of contracts. The classic image of a scalper portrays an individual who shouts, shoves, and survives on the exchange floors. But advances in technology and mobile communication now enable the scalper to conduct his or her business from virtually anywhere.
Scalpers rely on intuition. They buy from and sell to all timeframes, and their ability to respond to the immediate needs of the marketplace provides essential liquidity. As you may have guessed, this, the shortest of timeframes, tends to be utterly detached from longer-term economic thinking; fundamental information is far too slow and cumbersome. The scalper’s world is that of bids and asks and order-flow depth.
The day trader enters the market with no position and goes home the same way. Day traders process news announcements, reflect on technical analysis, and read order flow in order to make trading decisions. They also have to deal with long- and short-term program buying and selling, brokerage firm margin calls, mortgage banker’s duration adjustments, speeches by Federal Reserve governors, and “important pronouncements” by political leaders and influential portfolio managers. Anyone who believes markets are rational should spend a day trying to digest and react to the landslide of conflicting data stock market day traders must wade through to make a decision.
This group focuses on large quantities of technical information; they love numbers and levels and hype. Like scalpers, day traders also provide liquidity for markets, although very often at great personal expense.
Short-term traders often hold trades longer than a day, but usually not longer than three to five days. Short-term traders, such as
day traders, have to contend with a huge quantity of data. But they tend to pay more attention to technical and economic fundamentals.
Short-term stock traders generally focus on multiple days of overlapping prices, attempting to buy the lows and sell the highs while watching for breakouts. They use market-momentum indicators and monitor trend lines and trading channels to time their buys and sells. They are not out to influence market behavior but to be flexible and adaptable enough to react to and capitalize on events that trigger short-term market movements.
The difference between intermediate traders/investors and short-term traders is simply that they operate from a longer point of view. Participants of this group are often referred to as “swing traders” because they look to trade the tops and bottoms of intermediate-term ranges. Intermediate traders bank on the fact that markets, like pendulums, travel only so far in one direction before changing course.
An intermediate stock trader uses both fundamental and technical analysis, and normally has no desire to break new ground, choosing instead to operate within historic trading ranges. However, they do pay close attention to momentum and will quickly jump on board a trend when the longest timeframe begins to move prices beyond the containment levels of the intermediate-term market. When this activity occurs, multiple groups are acting in concert and longer-term trends often develop.
Long-term investors are far more attached to the securities they own. They have a stronger tendency to buy securities and put them away for some?time, with holding periods from months up to several years. When they are active, they tend to deal in large positions that are very visible to the market. Intuitive shorter timeframe participants understand that when the long timeframe enters the market, their purchases are likely to be large and possibly ongoing. With the size of money management firms these days, individual trades – even partial trades – can result in huge orders. In fact, some shorter-timeframe traders research what the long-term investors already hold, so that when they sense them selling they can take advantage of the resulting price movement. When the longest timeframe becomes active, it is not uncommon for all other timeframes to join in a large movement that can result in a major trend.
Long-term investors, as we’re defining them here, are responsible for breaking new ground, starting trends, upsetting the status quo. While this investor timeframe doesn’t necessarily account for a large portion of market volume, it is generally responsible for large directional moves in the market.
Why? Because the shorter timeframes primarily exist to facilitate liquidity, while the long-term investor is placing substantial orders in one direction. In other words, long-term money is much “stickier.” Long-term investors tend to look at the fundamentals of a company, the quality of their earnings, cash flow to book value, P/E multiples, talent, new ideas, pricing power, industry strength, and so on. They might not even consider the technical information that drives many shorter timeframe decisions.
What is important about the preceding stock market discussion is the idea that market activity is influenced by a wide variety of participants operating under a wide variety of timeframes and motivations. The way each of these participants combines and employs information is different:
- Scalpers are aware of key market reference points, but rely primarily on intuition and order flow.
- Day traders depend almost exclusively on market-generated information, because fundamental information is usually too cumbersome and can actually be counterintuitive for the process of day trading.
- Short-term traders supplement market-generated information with an awareness of recent fundamental information and the effects it can have on market movement.
- Intermediate-term traders rely on a balanced mix of fundamental and market-generated information.
- Long-term investors tend to follow fundamental information first, followed by market valuation, finally looking to market-generated information to supplement their understanding of market activity and individual securities. They also keep an eye out for trims and adds, and inflow and outflow of funds requirement.
It’s not easy to comprehend the nature and interaction of the different identities. And it’s extremely challenging to detect their everchanging influence to implement a successful trading strategy. In real-time trading and investing, the timeframes are far more difficult to distinguish than the neat descriptions above might suggest. While we have identified them separately, all timeframes coexist, intersect, and interact with one another in a constantly shifting tapestry.
As you continue to observe market activity, you will begin to recognize combinations of timeframe patterns over time. Trading requires a great deal of mental flexibility, because once you have learned to recognize a certain pattern, it may soon be supplanted by another, more-relevant pattern, which itself will eventually perish. The point being that traders who integrate discipline, emotional control, and an agile market understanding are generally able to let go of prior patterns and habits that are no longer working. To be successful, investors must recognize the confluence of evolving factors that will eventually lead to a changing market atmosphere.