Wednesday, October 01, 2014

Pay attention to your exits

Paying attention to your trading exits, and their pattern, can give you a clue as to whether your trading style is suited to current conditions.

If you get stopped out of one or two trades, then that can easily be put down to a failed breakout for example, or that the trend on an existing position has exhausted itself.

However, if you get stopped out of a bunch of trades in a short period of time, then that should be the signal to pause and reflect - it may well be that the characteristics of the markets have changed.

Remember, your primary goal as a trader is to manage risk. Having a run of losing trades may entice people to put on more trades - the law of averages will mean the next trade could be a winner. That is true to an extent. However, that will depend upon what the general market is doing. Think of the typical entry techniques employed by traders:
  • Entering on a breakout will work - until it doesn't.
  • Entering on a pullback or retracement will work - until it doesn't.
  • Entering on an oversold or an overbought indicator will work - until it doesn't. 
In all these cases what works and doesn't work, and more importantly, when these techniques will and won't work, can be traced back to the general market conditions - i.e. are they trending themselves or not, and whether they are volatile or stable.

What we are currently seeing in the indices is a potential trend change. Volatility has increased, with no real momentum in the markets - we've seen a bit of 'churning' going on.

On my own timescale, this has been going on for a while, and this is primarily why I have been lightly invested for most of this year.

I've shown these chart several times, but it shows the FTSE on a weekly timescale, and the range it has been in since last summer. On a few occasions price got right up close to marking new highs, only to fall back. now price is close to making new lows. I've also shown the Russell 2000, which is showing price at a similar critical juncture.

The disconnect in the markets is something I've been talking about on here for a while now. As always, price will let us know what is happening.

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