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Trading Framework - 2016

Trading Framework - 2016

Trading plans are as individual as the traders that devise them. In discussing plans with traders over the years, it's clear that many take a drill down approach. That is, they start with a macro or big picture view (strategy), then focus in to identify and implement trades (tactics).

There are many ways this approach is implemented. The big picture may be a fundamental view, a higher timeframe chart (weekly or monthly), or any other assessment that provides a framework for trading. My view is that 2016 will bring more of the same - an ongoing modest improvement in underlying economic conditions, overlaid by wild sentiment swings. Volatility is likely to increase as markets navigate the much choppier currents generated by central banks blowing in different directions. Adding to the party - equity markets are likely to reach deep value at times, as well as stretched valuations - and may do it more than once!

The Australia 200 index

What does this mean for local index traders? One implication is that in 2016 we could see levels below 4,900 and above 6,000. High activity combined with aggressive risk management is a rational response to this expectation. Luckily, the daily chart highlights some key trading areas:

20160106 xjo

The range since September is defined by the red and green zones at 4850/4900 and 5340/5405 - an outside range of 555 points. The 20 day exponential moving average (yellow chart line) illustrates a much tighter 165 point range, confirming the overall sideways nature of trading. Equally, while traders may feel movement has picked up, the 20 day historic volatility shows that the spike at the August sell off has reverted to conditions equivalent to the first quarter of 2015.

This analysis gives me a fairly straight forward trading framework. When the index is below the EMA and near the red zone, I'll look for buy set ups (this framework applies across a number of trading accounts/plans, so the actual entry and exit tactics vary). If it's above the EMA and near the green zone, I'll look for sell set ups.

I'll continue this way until the market breaks the range - although if it did fall through 4850 or rise through 5405 and immediately reverted, I'd trade that as well.

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