Wednesday, April 10, 2013

Don't go too fast!

During the early phases of a change of trend in the indices, the markets may be prone to whipsawing around. As a result you it is quite easy to be stopped out of new positions in stocks, even if the set ups you are trading appear to meet your criteria.

One thing I learned from previous experience is that it is all too tempting to open too many positions, too quickly. When trends develop in your favour, this is all well and good, as you may be able to make money quite quickly. However, if you do this and you are then subjected to whipsawing and/or failed breakouts, it is possible to erode your capital at the same rate.

To avoid this, I have a self imposed on the number of positions I can open on any given day. I know from speaking to other traders, this has helped them during indecisive market phases, cutting down on losses incurred and the resulting reduction in equity, as well as a loss of confidence in what you are doing.

This also helps especially during those horrible 'V' shaped reversals that can occur in the markets from time to time, which we saw most recently in November 2012.

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