Update Your Trade Plan as Time Marches On - dummies

Update Your Trade Plan as Time Marches On

By Kathleen Brooks, Brian Dolan

If you’re like most traders, after you enter a position you’re keenly aware of every single pip change in prices, at least as long as you’re watching the market. Every little price change, and the attendant change in your unrealized profit and loss (P&L), evokes emotions ranging from joy to despair and everything in between.

And that’s to be expected. After all, at the end of the day, it’s the P&L that matters, and pips are how that’s measured.

But one element that tends to receive remarkably little attention from traders, at least on a conscious level, is the passage of time. Prices may seem to stand still for extended periods — when a currency pair may be stuck in a range (that is, it keeps trading back and forth over the same ground) — but time is constantly moving forward.

Staying aware of time and its passing is an important skill for traders to develop. You know where the market price is now, so the question is really: Where will the market price be in the future? As soon as you think of the future, it becomes a question of time: When will it be there?

If you consider these questions as you formulate each trade strategy, you’ll go a long way toward incorporating time into your overall trade planning. More important, you’ll gain an intuitive appreciation of the importance of time in trading, and you’ll find yourself asking when as often as why or where.

On the most concrete level, as time progresses, it brings with it routine daily events, such as option expirations and the daily fixings, to name just two. These are specific time periods where traders can reasonably expect a flurry of activity, though it doesn’t always materialize.

Time’s passing also brings you nearer to scheduled news or data events. The pricing in of market expectations for major events occurs in the hours and days ahead of the event or data release. As the release time draws closer, anticipative speculation generally declines, and price movements can become more erratic as traders take to the sidelines ahead of the release.

Prices may chop around more, but ultimately not go anywhere. All these market reactions are as much the result of time as they are of the event itself.

On a more objective level, as time progresses, it can add significance to, or detract significance from, price movements that have already occurred, frequently providing trading signals as a result. For instance, the failure of prices to make an hourly close below a break of trend-line support suggests that it may be a false break and that prices are likely to rebound higher.

But if the break occurred at 10:12 ET, for instance, you won’t know until the next hourly close in 48 minutes. Potentially more significant trading signals are generated from longer time periods, such as a daily close above long-term trend-line resistance or a prior daily high.