The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
Age-Old Technique That’s No Longer Safe
06/06/2012 2:00 pm EST
Fast-moving market conditions mean that set-ups that used to take time to develop now come and go in just days, says Adrian Manz, who has since stopped holding positions overnight.
My guest today is Adrian Manz, the author of Around the Horn, which is a name for a strategy he’s used. So, Adrian, what do you mean by Around the Horn?
Well, the book was written around a baseball analogy because I like baseball and I gave it a very easy set of pattern names for people to remember. But really what it referred to, and what a lot of people miss, is that it’s all about the cyclical nature of the market.
The market moves "around the horn" and the market makes a move through various market cycles, various phases in those cycles. Each one of the patterns in the book represents something that we’re looking for in our trading that’s mirroring what’s happening in the sectors, the indices, and in the broader markets.
There are periods of contraction; periods of expansion; periods where the markets are pulling back; periods where they are reversing; periods where there are heavy reversals.
There are ten patterns that we follow, and it used to be the case that they would play out over a course of a year.Â So we would have—usually early in the year—a lot of these expansions, fast ball and line drive set-ups; then we’d have a lot of infield fly, switch hitter set-ups, then a lot of 3-2 pitch set-ups, and it would just progress very naturally over the course of the months.
The way the markets are moving now, we’re seeing that the time periods have contracted. What used to take pretty much a year to develop, now things move through all of these cycles in the course of a month or two.
So, the reversals happen very, very rapidly and you get the entire extension on the reversal that you would have normally expected over three months and it happens over the course of three days.
So that’s the in-a-nutshell explanation of what it does. It tries to anticipate market cycle and market phase and get you on the right side of it.
So if these things are happening that much faster, does it argue to have shorter time frames for your trading and to shorten the time you’ll be in a trade?
I think it definitely does. When we started trading this Around the Horn methodology, people who read the book always asked "Are you still holding overnight?" There used to be a section in each chapter—and we’re in our third edition of the book—that was all about how you handle the overnights.
If it closes strongly in your favor, hold a chunk of it overnight. Well, you know, in the most recent edition of it, I’m telling people that I hold nothing overnight anymore, because there is so much possibility for a reversal the next morning that I almost never get any benefit from a holdover.
Even news will change overnight, it seems. What we knew at the end of the day, or at the close, something’s totally different by the next morning.
Right. And we’ve already made this move, so if you hit that initial profit target now, there used to be a very easy, logical leap to expect that we’re probably going to make a move to the next level of support and resistance.
Now, you get this overnight news, like something out of Greece again, and every day there is going to be some solution to some sort of a problem and then the next morning the markets gap, and it just doesn’t make sense anymore to try and push the trades further than they naturally want to go.
Finally, do you see this increasing? Are we going to go even shorter and have to decrease those time frames even more?
Well, I hope not, but if they do, as a trader, it’s your job to get in there and focus on what’s happening.
If the market dictates shorter and shorter time compressions, then you don’t really have a choice. You have to go and you have to follow the money, essentially.
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