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*KAR 4.17 5:91 7.99 10.43

VAR 4.32 8.64 12.9?

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take raises considerably as well, from 6.7 cents on the 15-minute chart to just about 13 cents on the 45-minute chart. These charts illustrate the necessity of choosing a stop that is consistent with the volatility and its variability in the markets.

Market Quality

Another important element in setting time bar duration length is the quality of the market. That is, is the market trending or oscillating in the particular time frame

Figure 12.7 45-minute WH7 (March 1997 wheat) with KAR and VAR risk lines.

WH7-15min

*KAR 2.79 3.89 5.20 6.73

VAR 2.09 4.18 6.27

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that we normally trade? If the market is trending, we may not only trade in the time frame that we normally trade, but may enlarge it provided that our risks are under control. However, in an oscillating market, even the best of systems will whipsaw once the oscillations attain a sufficiently small cycle length. Thus, in an oscillating market, we want to drop down to a lower time frame. The point here is that price action oscillating in a larger time frame may behave as small trends in a smaller time frame.

Figure 12.8 15-minute WH7 (March 1997 wheat) with KAR and VAR risk lines.

Figure 12.9 Fifteen-minute chart of wheat, notice the late crossover signals during oscillations. Produced using TradeStation, a registered trademark of Omega Research Inc. Used by permission.

Examine the 15-minute March 1997 Wheat chart in Figure 12.9. Using a simple moving average crossover system with periods of 9 and 18, we see that we get a crossover following a gap open late morning on the sixth. This type of late crossover, whipsaw behavior is typical of oscillating markets. Also, given that oscillations are generating single highs and lows, we cannot rely on traditional momentum divergence indicators to give us much help. Remember that momentum divergence requires two highs or two lows in price to be compared with their respective momentum levels.

If we drop down to the 5-minute chart (see Figure 12.10), our moving averages cross the Friday earlier. Thus, we are already long into the gap open and have a reasonable chance of making profitable trades provided we see the oscillations exceed slippage and commissions. When the oscillation heights are too small to cover overhead costs, one may stand aside and not trade for awhile. If you are willing to accept risk in an oscillating market, then you can trade with a very large time frame, daily or higher, whereby you will ride the general trend but also suffer a combination of normal risk plus risk induced by the height of the oscillations.