Time Component of Short Long Positions in Stocks

Is there a possibility to use this generally known knowledge? Personally, I think yes, at least as a kind of filter function you can build the time component of the shares into your trading.

I would like to introduce you to a current trade of mine, where I was wrong from today’s point of view, but which I could still close with a manageable profit:

The point of this trade was that the prices had reached a resistance level and were overbought, so I built up short positions on the SPY (S&P 500 ETF) from 01.03. – 04.03. This was a swing trade that was to change into a position trade (preferably lasting several weeks and months), which was built up via position sizing. Position sizing means that you enter with partial positions and sell into strength until you build up your entire position at different levels. Here is a chart of this:

During this time I have built up 65% of my trading position. My average price was 199.47 in SPY.

On Monday the 07.03. the market made a bullish bar, and finally on Tuesday a bearish candle, which gave me the opportunity to exit with a small profit (at 198.43). I only exited because this bearish move was too cautious (keyword context), as I know that stock markets move down quickly and reversal signals were seen on my intraday charts, as shown on the chart below. Had a big bearish candle been made, I would have stayed in the market much longer, but the market “spoke” to me and so did the time component.

Here is another chart, note Momentum Extremes and Professional Activity:

The moment I saw Professional Activity at the lows (blue candles), accompanied by Momentum Extreme, which was not reflected in the price action, I thought I was wrong and took my profits off the table.

I would still be short in the market as my stop on the June contract in ES is 2065. Also, I could have shortened even further as I had just built up 2/3 of my position, but in any case the pain would have been greater and from today’s perspective it was right to take a small profit and get out. I can still shorten at the next resistance levels 2030-2060/2080.

With the thread (also called countertrend trading) you have to be prepared to endure different “pains” than with trend trading. It’s simply a matter of opinion which trading style you prefer (I trade everything: thread, trend, trend range), but especially with shorts, in my subjective opinion, you should include knowledge about the “personality of the market”.

Conclusion 1: If you are short in a stock or a stock index, expect a fast downward movement. If it does not come or only hesitantly, ask yourself if you are wrong. Go to your trading plan and make your decision!

Test question for traders: Is the following chart a bull or bear market? It is a weekly chart!

I am very sure that we (almost) all see a bull market here, which forms a bull flag formation with the last swing down.

Here is the resolution:

Here you can see better (monthly chart) :

This is AIG – one of the largest reinsurers in the world – whose share price had fallen from just under USD 1000 to USD 40 within 5 months. It’s slowly recovering and I will try to go long here, as I have seen an upswing in the last few years and am currently trading a topping formation and the outbreak of a bull flag. If I’m wrong – and I always assume I’m wrong – I will lose a little money. If I am lucky and right, I will have recognized the formation early, will get a good risk reward and try to stay in the market as long as possible.

Conclusion 2: Never ever forget the context of your Market!


See my other articles about stocks trading:

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