Without An Edge, Don’t Trade
For those of you who
have been frustrated by the markets lately, bear in mind one thing:
Without an edge on a per-trade basis, don’t trade. This market is offering very
few edges on an HVT basis per day. I am
finding most, if not all, in the first hour only. Sure I know that is about as
original as "trade with the trend," but in reality, few
traders/investors do it. Those that adhere to these two foundations are able to
navigate all types of markets.
I will give you an example that is separate from
the markets. I am an avid soccer fan, English Premier League in particular.
Naturally, as one who enjoys taking calculated risks, I have my on-line wagering
account, and place bets most weekends. It makes watching the games far more
entertaining. True to my personality, I approach it with focus and
thoughtfulness. In fact, I am even so anal as to know what my total return is
year-to-date, which is better than the S&P’s for 2001 and 2002 (you would
swear I was a nerd in high school). But for me taking whimsical bets,
investments and trades just does not sit well with me.
I am a human being, however, and as humans, we
all make mistakes, or stated differently, sometimes succumb to poor judgment.
This weekend was a case in point. Without boring you with all the details for
those Americans (99%) who detest soccer, I placed a bet on a long-shot game.
Why? The payoff. I was putting up $50 to win $400, and like most bad trades, I
attached some emotion to the bet. I liked the team because they were the
underdog. Conversely, placing a bet with the favorite was also a horrible
proposition. In this case, wagering the same $50 was putting me at risk, if the
favorite lost, for $200. These odds, from a potential loss standpoint were even
worse.
Naturally, this later wager is one that should
never be taken. However, why even take the first wager? Both wagers had the odds,
payoff and risk completely against you.
The scenario described above is really no
different than the markets currently. Every day I see trades where I am risking
more than I can make, and the trades that do have a big payoff, have little to
no chance of working. It is like the soccer bet, if it does not set up, don’t
trade. There is no shame in being patient. I have managed to do fine over the
last few weeks by following this simple advice. Go back to the column I wrote on
Thursday to see again how I define trading with the trend.
When will some volatility and, as a consequence,
better trading come back? Good question, I really thought the Microsoft
(
MSFT |
Quote |
Chart |
News |
PowerRating) news last Thursday was going to be a zinger, but as we all found
out, the pied pipers of Wall Street led the lemmings on a buying binge. So we
restart the clock waiting for earnings to catch up with valuations (don’t hold
your breath) or some capitulation. The weekly chart of the S&P 500 cash
highlights the market’s current dilemma. Until the market can manage a move
above the 50-week, or more importantly, the 200-week moving average, the market
remains in a downtrend.
Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| 1146 | 1435 (key resistance) |
| 1141 | 1413-14 |
| 1136 | 1389-91 |
| 1131-32 (confluence) | 1365-67 |
| 1126 (confluence) | 1339 |
| 1118-20 | 1324 |
| 1104-06 | 1288 |
| 1088 |
Thought For The Week:
“Although
the cheetah is the fastest animal in the world and can catch any animal on the
plains, it will wait until it is absolutely sure it can catch its prey.
It may hide in the bush for a week, waiting for just the right moment.
It will wait for a baby antelope, and not just any baby antelope, but
preferably one that is also sick or lame. Only
then, when there is no chance it can lose its prey, does it attack.
That, to me, is the epitome of professional trading.â€
—Mark Weinstein
On Tuesday, the last piece of the four-part
series on Single Stock Futures (SSFs) will
appear. This week I will be discussing some of the strategies I plan to employ.
These products have suddenly opened up several more approaches that will not
only complement my existing style, but also offer a few stand-alone strategies. Click
here to see the first 3 installments.
As always, feel free to send me your comments and
questions. See you in TradersWire.