While the world waits to hear what Janet Yellen has to say about Fed policy this morning, it is probably a good time to expand on the idea that the character of the stock market has changed and look at what investors can do about it.
Last week, it was suggested that moves in the market - especially on days when something big occurs - have become exaggerated due to the proliferation of algorithmic trading. "When a bunch of trend-following algos start chasing each other's tail, the end result is an increase in the size of daily moves," was one of the key points made.
As we explained, the key here is to understand that daily price action is becoming more and more volatile (and perhaps even a bit artificial) - in both directions. Once the algos get on a roll, they often just keep going until the closing bell rings. Then traders come in the next day and start all over again.
And to reiterate, we're not complaining about the computers here. Algo-driven trading is fine, fair, and completely legal. No, the key point being made today is that investors need to recognize that the game is changing.
What Can Investors Do?
In talking to investors (professional and otherwise), it is obvious that this topic is important. Most folks recognize that the game is moving faster and farther than ever before. However, very few have any ideas about how to adapt their strategies to the changing environment.
So today, we will discuss five different ideas to help combat an environment where intraday volatility is increasing and the moves have become exaggerated.
So without further ado, let's get to it.
Adjust Your Time Frame
The first thing that an investor can do is to adjust the time frame you are ...
