Thursday, June 04, 2015
Ease off the loud pedal!
"I handle losing streaks by trimming down my activity. I just wait it out. Trying to trade during a losing streak is emotionally devastating. Trying to play 'catch up' is lethal." - Ed Seykota
If you are a rules-based discretionary trader, you have the ability to decide when to take signals, or when to stay on the sidelines.
It is clear at the moment that the current general market conditions are not conducive towards breakout trading. As mentioned on a few recent blog posts, those decent setups identified are either simply not generating an entry signal, or those that do quickly fail.
It is easy in this environment to chew up your equity by continuing to take signals that quickly fail. This is where discretion can come in and work in your favour, compared to a fully systematic approach, where every signal generated results in a trade being opened, regardless of the prevailing conditions or level of market volatility.
This is what I learnt from my own experiences in 2011, where the market conditions were similar. Back then, breakouts to the downside were quickly bought, and breakouts to the upside were quickly sold, so it was easy to rack up a run of losing trades quite quickly
"Psychologically, I tend to alter my activity depending on performance. I tend to be more aggressive after I have been winning, and less so after losses". - Ed Seykota
The paradox here is that, you cannot obviously make a profit if you don’t take any trades. Which is why people are continuing to initiate new positions. But there are times when you need to throttle back, accept that your method of trading is not working at the present time, and wait for things to improve. You don't have to go at full speed all the time.
"Whenever there is a really rough period, I try to play defense, defense, defense. I believe in protecting what you have." - Marty Schwartz
If you were driving along a road with a speed limit of 60mph, would you travel at that speed regardless of other traffic, junctions or roundabouts, corners, the weather etc? Of course not. You would slow down ahead of such situations. To travel at that speed regardless of external factors or conditions would be downright dangerous. That limit is only a guide to the maximum legal speed.
It is the same with trading, particularly if your basic approach allows you discretion in determining your level of exposure, market bias etc. Your own 'speed limit' simply determines your maximum level of exposure and risk, when everything is in your favour - i.e. You are in trades which are in profit, breakout signals are working, the market conditions are generally trending and of low volatility. In the last three years I have only once reached those levels in my own trading. Most of the time I am well below those thresholds, and some of the time I am completely out of the market, and fully in cash.
Therefore, you ideally want to trade when conditions are favourable towards your chosen style of trade - but still not exceed your risk and exposure parameters. In conditions like those we currently have, this is when you need to slow down, protect your capital, and wait for better conditions.