What are the best tools to use in volatile market conditions

SwingMan

I'm relatively new to Technical Analysis, but from what I can see, most tools are designed to work in less volatile market conditions than we currently have. Which tools should I be using to determine the best entry and exit points for a given stock in these conditions.

markd

Volatile conditions occur when all time frames want to trade at once; that is, long term, intermediate term, and short term traders all see a reason to change their position in the market. When long term players (generally value players) decide to dump (instead of distribute over time), they upset the market's usual balance of buyers and sellers (on which TA indicators are based). This sets off stops and margin calls for intermediate and shorter term players, further aggravating the imbalance. Eventually everyone who wanted to sell, or was forced to sell, is done. This leaves a huge vacuum in the market on the sell side. If prices have fallen enough, value players will see a rare opportunity and jump back in, but lack of supply will push prices up fast, attracting the boldest shorter term players. The unusually quick gains will cause them to take profits. Then the battle begins between late sellers and late buyers until the trend asserts itself.

JMO, but Fibs seem to be the most versatile technical tool, and the most useful in volatile conditions for estimating where reversals could occur. If a fib level more or less coincides with prior support or resistance, or high volume bars (i.e., a level where buyers or sellers clearly took control of the market direction), that's a place to give more credence to reversal patterns.

markd

I'm going to take another shot at this question - maybe a little clearer:

Since volatility results from a convergence of time frames (players from different time frames all acting at once), when it occurs, you need to change time frames, not (necessarily) indicators. So if you normally trade in a daily time frame, your indicators will have parameters set for action at that level. When weekly and monthly traders suddenly dominate the market, you need to look at indicators with parameters set for their time frames.

If you haven't read Alexander Elder's "Trading for a Living" (or other books by him), you might find his discussion of trading in three time frames helpful.

SwingMan

Thanks for your comments. I had a feeling I may have to change my parameters so you have confirmed that for me. I prefer to be a short term trader (i.e. 2 to 4 months), but it seems like I have to start thinking in even shorter terms or wait until things become more stable. Anyways, I will try to read Alexander Elder's book.

markd

You could also do some long term research on an indicator you find promising, e.g. collect every signal for the last, oh, 14 years (since 2000). That would give you a couple of bear markets and a couple of bull markets. But do it on an index like the SP500, or Nasdaq or Russell, not an individual stock, as these tend to disappear through mergers or bad luck.

SwingMan

Thanks again for your suggestion. I will follow up on it.