Here’s How Traders Can Flame Out In Quiet Markets
It is old news by now,
but there can be little doubt that the current market
is rather challenging for traders. The only ones who seem to not have a problem
are those who bought a few weeks ago and still are long….I am not one of
them. Such is life. The strategies that I have used for many years still work;
the problem is that that there are only a handful of opportunities each day, and
then, spotting them without being lulled in my “noise” adds another layer of
difficulty. I have been through these periods before, they do not last forever,
but it seems like they do. I am confident that yet again I will walk away with
something to show for my efforts and more importantly yet, a better perspective
on how my trading style works.
There are many however who simply cannot let well
enough alone. When their strategy is dead, they cannot accept this, they feel
the urge to move on. Either their buddy told them about some new system that is
kicking butt or the infamous message boards make you feel like you are the only
one who is struggling. Guess what? All traders are challenged by this market,
yes there may be a handful of exceptions, but by and large, those that are
honest will admit this.
Let me use some dramatics here. The longer this
market remains quiet, the greater the probability that traders will flame out.Â
The reason? Overtrading.
“Most of us believe our
primary goal in the markets is to make money. This isn’t true. Our real
objective is to trade well at all times, because profits will come naturally if
we do that. Of course, the mental shift required to get from the effect to the
cause can be very difficult.
The profit chase forces us
into bigger positions and bigger plays. As in baseball, market players who swing
for the fences strike out a lot and have poor batting averages. The bottom line
is that most traders never overcome the big losses they incur while trying to
make the big plays.
The second type of
overtrading relates closely to the first. We may keep our trade size at
tolerable levels but take too many positions at the same time. This can be more
dangerous than the first error. In many cases the overall capital commitment is
even larger, exposing our equity to much greater losses.
Each trade has its own
dynamics, pattern and eventual outcome. This means we have to watch all of our
positions closely to make sure they do what we expect. But we can’t give each
trade the attention it deserves when we have too many stocks to watch at once.”
–Alan Farley
Now, let’s consider what many never do:Â Not
trading at all. Depending on your style, it is very possible for there to be
times when the setups that you look for simply do not show up. For me, my trade
frequency is way off. On average I am doing about five
HVT trades in any given day. Remember, the market emits more noise
than patterns many times. Do not get sucked in.
“We love trading and want to
be in the market at all times. This leads to frustration when we can’t find good
setups. If we lose our focus, the creative mind will fill in the missing pieces
and construct opportunities that don’t exist.”
–Alan Farley
Please do not construe this column as being
negative or pessimistic, far from it. The fact of the matter is that this market
is unique to most of us (it resembles the tape on a Friday afternoon in August)
and we need to make adjustments, that is it, no dire predictions.
In terms of market perspective, let me share
these observations from my friend and fellow trading colleague, Bo Harvey:
A look at the charts and
you can see that, should we get a pullback in the market, several stocks are set
up to retest their 200-day EMAs (
(
TXN |
Quote |
Chart |
News |
PowerRating),
(
WMT |
Quote |
Chart |
News |
PowerRating),
(
HD |
Quote |
Chart |
News |
PowerRating),
(
KLAC |
Quote |
Chart |
News |
PowerRating),
(
NSM |
Quote |
Chart |
News |
PowerRating),
(
IBM |
Quote |
Chart |
News |
PowerRating),
(
C |
Quote |
Chart |
News |
PowerRating), and
(
MWD |
Quote |
Chart |
News |
PowerRating)). Whether the stocks and indices hold the
200-day EMA on any retest will be a vital sign of whether this has been just
another bear market rally that sucks as many in as possible*, or the start of a
more sustained multi-month advance.
*Equity mutual fund
inflows for April were at their highest since April 2002.
| Support/Resistance Numbers for S&P and Nasdaq Futures |
||||||||||||||||||||||||
|
My new trading service,
“Dave Floyd’s Trading Room,” through which I offer live real-time
audio commentary, analysis and alerts, is now available. I encourage you to check
it out.
Click here for more information.
As always, feel free to send me your comments and
questions.
P.S. I also have a new trading module
available which teaches how to trade my HVT style through bar-by-bar chart
simulations.
Click here for information about the module.