Monday, March 31, 2014

Sitting and waiting

Another month has now passed with a distinct lack of trades taken. Over February and March combined, only 7 new positions were initiated, and currently only 3 positions remain open. The number of trades recently taken is way below the average, but this is simply as a result of a lack of direction in the general markets.

There are only three things that can happen to price - go up, go down or go sideways. The last few weeks have shown a very choppy, volatile sideways movement in the indices. This is the worst market state for a trend follower to deal with.

There is no doubt that it has been possible to make money in this period. To do that, however, you would generally need either to be looking at shorter-term trades and be very nimble, or take a much longer-term view, with much wider stops.

It is in these periods where you can faithfully take signals presented to you by your system, however by not referring to those general conditions, you could easily chew up your equity with a bunch of losing trades, as well as easily get frustrated.

Once I'm in a position, I will let it run until that stock gives an exit signal. However, if stocks break out when the general market conditions are not favourable, then I am far more selective, and may even pass on the trade. Trading is an odds game, and I want those odds to be skewed as far as possible in my favour. That will generally mean having the general market also trending in the direction I am looking to trade.

Developing the skill of when to participate in the market, or when to stay on the sidelines, needs to be developed over time. While referring to your system parameters, and what price is telling you, is part of the equation, this is also a result of part discipline, part learning from past experience and part having confidence in what you are doing.

This is where the individual trader can have the advantage over an institutional trader, in that he can treat cash as a position. There is no need to be fully invested all the time, nor is there pressure to take on new positions when conditions are not suitable to your method of trading.

As I mentioned in a recent blog post, the choppiness we are currently experiencing reminds me of early 2011. All I know is that some point, price will break out of this consolidation area, in one direction or another. Until that happens, I am content to be extremely selective in what positions (if any) I may take.

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