Wednesday, January 14, 2015

So far, so good...

Given the market action and volatility since the beginning of the year, and in particular this week, it is no surprise that I've been stopped out of a few long trades, including my most profitable position, which ultimately yielded a profit just over +5R.

While this is disappointing, it is to be expected. You cannot control the market and the price action of the stocks or instruments you trade. You can only control the elements you can control - namely, your risk per trade, your stop placement, the positions you elect to take, and your overall exposure.

Market action like we are currently experiencing will test both you and your method for weaknesses. You learn a lot about yourself and your tolerance to volatility, and how you react to the process of giving back profits before an exit signal is generated. It is surviving these periods which will give you the confidence to move forward, or will highlight areas in your overall approach which need attention.

In my own case, focusing more on price action in the stocks I am looking to trade, and placing less emphasis on what the general market is doing has been like a breath of fresh air psychologically.

By looking at the price action solely on the stock(s) I am watching, within the context of its own longer-term price action, I am now only concerned with the timing of the entry. I am not having to time both the entry while also seeking that it is timed to coincide with what the major market averages are doing.

By definition, you will find that in sustained general market uptrends, a large proportion of stocks will be moving up within the context of their own longer term price action. This correlation is also true in market downtrends - go look at almost any stock chart you want to in 2008, and you will see that the price action in that stock will be below a long-term trend filter, such as a 200 day moving average, for example.

In my opinion, the big advantage of this approach is when the indices are not in a trending phase - witness a chart of the FTSE in the UK over the last 18 months or so. There has been no discernible trend in the index itself, yet there have been plenty of stocks that have developed significant trends, in either direction in that period. And, in all of those cases, those stocks would have given a clear signal whether you should look to go long or short by reference to either its own longer term price action or some form of trend filter.

This is where I struggled in 2014 - I passed on many good signals and set ups that I had identified, and which ultimately proved to be profitable, because of what the indices were (or weren't) doing at the time.

While it is frustrating to be stopped out of those trades, at least I can console myself in the knowledge that I am in positive territory for the year despite all the volatility. And ultimately, the returns generated going forward will prove whether the revised approach works or not. Of far greater benefit to me, though, at the moment is the confidence and belief I am gaining with the changes to my trade selection and timing.


  1. Hi Steve,

    I've been following your blog for quite a while now and do enjoy your posting.

    I have a question which is why don't you trade futures instead?


    1. Hi Rayner. I've always traded stocks, even when I very first started out day trading over a decade ago, so I have stuck to what I know. However I am looking to trade commodities, some forex etc, going forward.

  2. I've been able to use vix and spx as lock out signals when compared to a long term trend filter. Works well for long only.

  3. Good post. I recently figured this out myself. On weekly charts I look for trends which look nothing like the SPY / QQQ etc because their trend will ultimately do its own thing. Trying to figure out what the general market will do next can drive us crazy.

    One example is that of (FE). I got in a little late in terms of the trend but I entered right at the trendline and risk:reward is real nice.