Thursday, October 03, 2013

A safe prediction - and having the patience to react to what happens

Readers of this blog will know that I have a general disdain for predictions. However, here is one prediction I am comfortable with:

Regardless of the outcome of the US Government shutdown, the debt ceiling discussions, or any other political or economic announcements or happenings, I can confidently predict that the markets will do one of three things:

1) Price will go up;
2) Price will go down;
3) Price will go sideways.

Depending on how price action in the major indices develops, that will give me a cue to look for new positions with either a long or short bias. There is no need to rush in. Periods like this help develop patience and discipline in a trader.

Notice I said the bias should be one way or another, not that you should only trade long or short. There will always be individual stocks breaking out in both directions, regardless of the prevailing market conditions.

How conservative or aggressive a trader wants to play the current markets is a discretionary decision that only one person can answer. What is right for one trader may not be right for another. For what its worth, my opinion is that you should err on the more conservative side, until the markets have shown their hand.

For trend followers, who react to price movements, this is all part of the basic concept they use. But it should also apply to interpreting the current market conditions as well as the price action of individual stocks they wish to trade. I have had several potential setups come and go the last few days, which I know have now started to develop nice price movements, but I have chosen, rightly or wrongly, to give a miss. Why? Because the setups were for long trades, yet the price movement in the indices has been in the opposite direction.

One thing I haven't done though, is cut short any existing trends in open positions. As long as they are acting properly, and haven't triggered an exit signal, they will stay open. I'm letting those profits run as far as possible. When a stock gets up a head of steam in a particular direction, that trend will tend to persist.

Trading is an odds game, and I want the odds in my favour as much as possible. If you are looking to open new positions, make sure the bias in your portfolio is in line with the general market. If you find shorting difficult, or cannot find any appealing short set ups (which in my case is why I am not short any stocks at the moment), then preserving cash and keeping your powder dry is an option the individual trader has. As for my own trading, despite the lack of activity in the last couple of weeks, the results suggest I'm doing something right...

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