Understanding the best times to trade or when to be in the market

With the market being as volatile and hectic as it has been in 2020, I've gotten countless messages from friends and family members seeking advice on how to start "trading" and how to get into the market to take advantage of the current conditions.

I usually start off by tipping them that they're probably better off investing in gold unit trusts and looking for value stocks to hold for a few years, but there are people out there just looking to make a quick buck or two.

If you're getting into trading, one of the first things people tend to try and sort out is what type of trader are you? Are you a swing trader? A scalper? A day trader?

Whenever people ask me that, I can never honestly give them an answer.

The thing about trading is that almost everyone has different philosophies and different "rules" that they tend to go by. I'll be sharing some of mine in this post with regards to how I view the market and understanding when is the best time to trade.

Before we even get into figuring out what timeframe one should be trading, it is important to establish an understanding of how to go about any trade. In that lieu, I rely on the two things every trader has in their toolkit i.e. fundamentals and technicals.

The fundamentals are pretty much the guiding story in forming a view about any asset you're trading. Let's take gold for example. What are the key fundamentals driving gold ever since March and the virus crisis?

1. A rush to dollars amid fears of a financial crisis saw gold dip back below $1,500

2. Global central banks took drastic action in easing policy to deal with the crisis

3. Negative-yielding debt continues to grow, fueled by the virus crisis response

As far as I can tell, those were the dominant factors for gold in March/April and most of that has carried on all the way through the year.

Point #1 was largely negated as the Fed introduced swap lines to address the strains in dollar liquidity. So, that was a short-term fundamental narrative.

Points #2 and #3 are themes that were playing out even before the virus crisis but the timeline has instead been brought forward amid the pandemic response.

Building on that, central banks are not going to move away from these easing policies in the next 2-3 years at least and perhaps even longer if there are hiccups along the way.

As such, the key fundamentals driving gold comprises of mostly key long-term narratives and that should be the major focus when viewing any gold trade.

The next part is working with the technicals. This is where one uses the market action and reaction as levels to identify and limit risk when entering a trade.

To do that, I use only three tools mostly i.e. 100 and 200-point moving averages, trendlines (support, resistance areas), and Fibonacci retracement levels. These are essentially the same tools that Greg uses when he analyses his charts.

Back to the gold example, the focus on longer-term fundamentals means that there should be a heavier focus on the larger timeframes when trading gold.

Of course, paying attention to the near-term levels are also important as that is when you define short-term bias first and foremost.

However, if your trading horizon is for the longer-term - as driven by the fundamentals - then your risk levels and entry positioning should correspond to that accordingly as well.

A recent example on that in gold is the pullback in November amid vaccine optimism:

If you notice in the posts, the focus on the initial breakdown stayed on the daily chart because the pullback was a rather sharp one and it destabilised some of the fundamental convictions in gold over the past few months.

There is also some element of technical exhaustion upon breaching $2,000 but I'll leave that as a separate topic from the discussion here.

Amid the bounce back in gold, the focus then shifted slightly back towards key near-term levels to see if gold buyers had appetite to regain control.

And once they did, that allowed gold to push towards $1,900 earlier this week before pausing upon meeting key risk levels i.e. 100-day moving average; with the addition of another fundamental factor coming into play in December i.e. seasonal pattern.

For me, that is how I build up a trading conviction and how I use some of the elements in the market to try and solidify any view or subtract from it.

If anything else, I would argue that amid the virus crisis, a lot of the market narratives have shifted towards being more longer-term and that applies for the dollar and risk trades especially - arguably two of the biggest drivers in market sentiment.

But still, there will be periods where the market is focused on short-term trades, such as those we are seeing with any pullbacks and retracements.

For example, the reaction to the Brexit deal announcement today could see cable take out the high last week of 1.3624 and if it does, buyers could run away with that.

However, if that level holds up and contains the gains in the pound, it wouldn't be surprising to see gains fade sooner rather than later as a trade deal will do little to take away the economic anguish in the UK.

Let's not forget, this deal does not encompass services for the most part.

So, if you're trading cable right now, the short-term focus is arguably more important with the focus being on the Brexit news today first and foremost, before all the other fundamental factors are considered once again.

Conclusion

When viewing different asset classes, there is a different focus and thus, a different game plan when you approach how to trade it and when to trade it.

At times, many people who meet me assume that I hold positions and speculate/guess where the market is headed. Their idea of a "trader" is that he/she has an idea of "what currencies should one buy/sell now" and that's how he/she makes money.

But it goes far beyond that. There are times I don't even hold any conviction in the market or hold positions for days/weeks.

And I am sure that applies for many people here as well. It isn't so much about the frequency of the trade, but more so of the quality. And when I talk about quality, the above examples (though in not much detail) are the sort of things I mean.

Don't be fixated on trying to stick with a certain timeframe to trade or trying to rush into any trade. FOMO can be a killer and if you miss one opportunity, there will always be another one in the market. You just have to be patient and diligent.

In other words, be water, my friend.