Choppy markets of December 2011

With the year now ending, an interesting realisation during our trading this month is the subtle changing of the market.

If you are a swing trader, you expect that higher highs and lower lows generally indicate an uptrend or a downtrend respectively. In ideal conditions, yes, they do, but the markets are no longer ideal with "algo"rithmic programmed trading, that try to fool small time traders who use this and other similar methods.

What these algo program trends show are higher highs and lower lows together! But there is a secret, its a pattern within a larger pattern, which continues to be well behaved. The question then is judging the shape of the larger pattern which is well behaved and filtering out the noise at the micro level.

This change has made intraday trading more complex, particularly Nifty trading. Volatile indices do not suffer this symptom so much, but then these are already high risk instruments because of the volatility.

What do you do then? Several answers:

- avoid trading in the periods when the market has these characteristics.
- Fine tune your risk/money management system.
- Avoid the low risk reward trades, where rewards are nebulous, small or doubtful.

Look at price action and volume that indicates the development of a significant trend.. since the old adage, "trend is my friend: is still the most reliable way of playing these choppy markets. The challenge now is now simply being able to filter out the noise.