Price Oscillations and Short-term Trading

When I am not doing a lot of active trading, I am actively thinking about trading. That is what I am doing at the moment and my mind is on price oscillations. Traders all think they know about oscillations but they are really quite complicated; so let’s review them a bit.

The simplistic definition of price oscillations is the movement of price over time. I personally do not like that one, because price can move sideways – sometimes for a considerable time. To me price oscillation includes movement up or down. So for me, a price oscillation has at least three components:

     Amplitude: The difference between the high and the low price of the movement.

     Frequency: The time difference between the high and the low.

    Trend: The average direction of price movement over a time frame.

So I think of price oscillation as the movement upward, downward, or both – over time.

Ah, that word time. Time, it turns out that time is a vital component of oscillations. Set your chart to 10 ticks per bar (I DO NOT USE MINUTE BARS). Observe the oscillations according to the three parameters above.

Now increase the ticks per bar to 100 and repeat your observation of the above parameters. It is more common that not that all three parameters be considerably different.

So what is that big deal about that?

Ah, Grasshopper, that is the really big question! And a question every trader needs to answer in order to select a proper time frame in which to do his trading.

This subject could run into a long chapter in a book about trading, so I am going to give you the Reader’s Digest version here.

A profitable trading time frame will exhibit a sufficiently large number of price oscillations whose amplitude and frequency offer a trading opportunity during your trading day – that is the amplitude needs to be sufficient that 80% of it equals at least two times your risk on the trade.

For the mathematically challenged, if you are going to risk $200.00 on a trade, the amplitude you need to trade must be AT LEAST $500.00 in value.

And the oscillation must happen within your trading time frame. I do not like to hold a trade overnight, so I seek trading opportunities that are pretty fast in duration.

The third component of oscillations, trend, comes into play when selecting your trade direction. The trend is your friend, except when it is about to change. But that is another topic.

Lots of talk about all this in my books, Trading Between the Lines and See the Music of the Market





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See the Music of the Market

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