For those who have not traded through such a period in the markets before, you have been all geared up for an important educational experience over the three months or so. We have seen a big jump in volatility, combined with a sharp move to the downside followed by a 'V' shaped reversal in the general markets. Ideally, when experiencing these changes in the market state you want to keep your tuition fees as low as possible.
At times like this, you need to avoid all the talking heads on CNBC or Bloomberg, the opinions of other traders, or thinking about market mechanics as well.
What DO you need to focus on? Simple. Your own method, risk management, and ensuring that your thought processes are not disturbed by outside forces. Do not be influenced by others - even those who you think may trade in a similar manner to you. You need to think clearly and objectively as possible.
You need to be blinkered in your own thought processes. Concentrate on what can make you money within the framework of your trading plan. Also, do not waste your time and effort thinking about things which may or may not happen, or other matters related to the market which form no part of your own trading plan. Concentrate on YOUR method. If it is proven, then what do you have to fear?
And if the markets are acting in a manner which is not favourable to your own method, then you need to develop the ability to see that, accept it, and step aside.
"While the speculator doesn't have the product knowledge or the speed, he does have the advantage of not having to play. The speculator can choose to only bet when the odds are in his favour. That is an important positional advantage." - Larry Hite
See how your method works in such conditions. Also, remember that cash is a position. If you are uncomfortable then retreat to the sidelines and learn. This is a great time to reinforce certain key trading principles, as well as working on your method and yourself.
As an example, you may only encounter a market downtrend once in a while (or a major market downtrend every few years), but it is critical to know not only how your own method works, but also how YOU as a trader react to what is going on.
Earlier in the year, when the major market averages were not trending, and were relatively quiet, then those traders who like to play off support and resistance probably did very well. Then, as volatility started to increase, those who trade short-term or on an intra-day basis were the ones making the money. Those who trade with the trend probably found the markets more difficult. Then, as downtrend tried to get under way, those who follow trends would have started making money. But then the 'V' shaped reversals may have put paid to that. Going forward, who knows who will profit - and when?
Other traders who I know and respect have likened the last few months to that of the second half of 2011. I can certainly relate to that, as I struggled in that period. This year, I put into practice what I learned from that period, by retreating to cash for most of the time. Yes, it is frustrating that conditions have not been favourable towards my style of trading. But, by learning from my previous experiences, I have kept my trading equity intact, and avoided a lot of stress.
Even if you do not rely on what the major market averages are doing, you can still identify when conditions are favourable to your own chosen method.
In my own case, very occasionally I am putting on a single position as a 'probe', testing the market, and seeing how it reacts. So far, none of those trades have worked. But, by keeping an eye on the quality and quantity of the setups I am seeing, by looking at what is coming up on my scans, and by observing whether breakouts are starting to work again, I will know when the odds are moving back in my favour.