The Condition of the Market Affects Your Trading – Trade Accordingly

Yesterday I posted my watch list with a note that I was risking only .25%. That post led to the following question:

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Losing Trades Are a Big Part of Winning Systems

Losses are part of trading. In fact losing positions make up the majority of many winning trading systems. That is, many winning trading systems have a winning percentage that is less than 50%. It seems counter intuitive that you can be wrong more than you are right and still make significant money in markets. But that truth has been proven by many well known traders.

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When Markets Chop, Reduce Risk & Practice Patience

The market environment has not been friendly to swing trading lately. This choppy action started in late November and it has continued. When the overall market is going sideways set-ups tend to break out intraday only to fade before the close or early in the next trading day. Winning trades become much harder to come by and when they do come in, they are much smaller.

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A Stock Chart Cheat Sheet Worth Your $STUDY

I’m not sure who created the below cheat sheet but it is worth sharing. If you spend some time studying it, these patterns will begin to jump out at you when you are looking for stocks to add to your watch list.

Since proper risk management can be the difference between a profitable trader and one who goes bust, knowing the area in which to set your stop is critically important and this cheat sheet does a great job of identifying stop areas for you.

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The Cash Trade Didn’t Last Long

On November 8, I was 100% in cash. The market was lacking direction; my set-ups were not working, I couldn’t find an identifiable trend to trade, and the world was borderline psychotic about who should be the next U.S. President. This added up to uncertainty. Markets do not like uncertainty which was confirmed by my observations that breakouts were immediately retreating and not following through. Hence, I went to cash.

The truth is, I should have gone to cash much sooner. My set-ups had not been working for weeks due to the market chop. I even wrote an open letter to trading psychologist Dr. Brett Steenbarger about my inability to stay inactive. And he responded.

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Why I’m in cash right now

The market is lacking direction. Set-ups that have worked for me in the past are no longer working (long or short). There is no identifiable trend to trade. Yesterday’s big move to the upside lacked volume and could have simply been short-covering as traders exited positions ahead of the election.

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Why is it so hard to be inactive?

This post will be therapeutic for me. I hope you enjoy it.

There are times in the market when my system just doesn’t work. These are the times that I am supposed to stay in cash and wait for a trend to appear. I know this to be an absolute fact. Hell, I even know which type of market I need to avoid. Any guesses? Yes, the market we are in right now: constant chop with no identifiable trend. This type of market eats my capital alive if I let it.

I know this. Yet, I still find myself fiddling: running scans and adjusting my risk to take smaller positions only to witness repeated bounces and reversals leading to a string of small losses. Why the hell do I do this? Death by 1,000 cuts is still death and it’s pretty damn painful.

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