Many, many times, overtrading a market (i.e., placing trades when you lack an objective edge in the trade) begins with unrealistic expectations of the market.
The most common mistake I see active traders making in the current market is that they are expecting moves to extend much more than they actually end up extending. In short, they are not factoring current volatility into their expectations.
"I think we could go way above 1000," a trader told me yesterday. His scenario was that the round number would bring lots of bulls late to the party into the market in a panicky rush. Maybe that will happen over time, but his scenario called for stocks to move 3% or more on an open-to-close basis. How many times has that occurred in the last two months? Just once.
Not exactly a scenario to hang your hat on.
When you find yourself anticipating a big market move, ask yourself whether the market is actually moving in that way, or whether you are simply hoping for such a move. The average volatility (average high-low daily trading range) for the S&P 500 Index (see above) is less than one-third what it was earlier in the year. In the last 10 trading days, only one has moved more than 2% intraday. In January and February we saw a number of ten-day periods in which *every* day had a range of more than 2%.
If a move isn't going to extend, it will reverse.
That means being proactive in booking profits when ranges are small.
It also means that placing many trades to catch a big move is a great way to get chopped up and lose money.
Smart trading begins with realistic expectations.
For more, check out posts on Learning When to Not Trade and Pressing Too Hard to Win.
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1 comments:
One way I manage my expectations for the day is to use a market profile concept from Mind Over Markets for estimating the current day's range. If the market opens within value or within the prior day's range, and price is accepted (spends Two TPOs within it) the day's range will generally be the same as the prior days(give or take 10%). If I believe we have the low/high in within the first hour(which also has a high percentage of occurring), it helps me project and manage my expectations for the day. If we are in just consolidating with no sign of a low or high in, it still helps me with upside and downside range extension estimation. If price is not accepted within value or the range for two 30 minute periods(TPO), the range is considered unlimited, due to the rejection of prior day's value. What are your feelings on this method, and is there any way to go about back testing it?
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