Tuesday, December 15, 2009

Standing Aside in Slow Markets

I haven't traded this week. I placed two trades last week and closed them out quickly, one for a modest winner; the other for a modest loser. So this will possibly make two weeks where, basically, I haven't swung the bat and haven't made any money trading.

I'm fine with that. And therein lies a lesson.

When I began trading late in 1977, I made a conscious decision: I would pursue the markets, but not for my primary livelihood. My market activity would always be to supplement my income, not constitute my income.

Because of that decision, I've always had savings separate from my trading capital, and I've had investments separate from my trading capital.

And that gives me an important option: the option to stop trading.

My trading is mostly in the S&P 500 Index. Over the last twenty trading sessions, the median daily high-low range in SPY has been 1%. That is down 50% since June. Daily trading volume is down by a comparable percentage.

Here are the daily closing prices for SPY over the last 20 sessions: 111.11, 111.14, 111.14, 110.02, 109.41, 111.00, 110.80, 111.27, 109.44, 109.55, 111.25, 111.36, 110.81, 111.11, 110.93, 109.82, 109.81, 110.71, 111.05, 111.78. That's a little bit more than a 2 point range.

If I'm sitting at the poker table and keep drawing poor hands--a couple of low cards, unsuited--will I be placing big bets? No. I'll muck hand after hand. Eventually I'll draw cards worth playing.

If I'm a good baseball hitter and a pitcher is pitching around me, will I start swinging hard at pitches outside the strike zone? No, I'll stand there and wait for my pitch. Eventually I'll get balls worth swinging at, whether it's during this at-bat or a later one.

And eventually I'll get market moves worth trading for my style of trading.

But one key to longevity in markets is being able to stand aside when markets aren't giving you good pitches. It's the capital I don't have at risk in markets that allows me to keep my trading capital out of unnecessary risk.

To have a passion for trading--but not a need to trade: that's a great place to be if you're going to last in the markets.



Tahoe said...

Another fabulous post. I remember the first time I spent a day without trading anything. Initially I was frustrated, and even beat myself up for being chicken or too scared to enter trades. Long time traders told me that another perspective was that I obeyed my rules, and most importantly didn't trade anything that didn't make sense to me. Now when I have those days, I am grateful for my rules, and my discipline. It was an important change in "expectation" for me and once realizing this improved my trading immensely. Thank you Dr. Brett, your work is always valuable and insightful!

heywally said...

One other possibility for these types of market conditions is to -- especially if you are a full-time trader -- work on your 'short game' with very small positions. While the market has been very slow, it also has been trading in a fairly predictable and narrow range. Since we are still in an intermediate uptrend, I am working on identifying select buy points during the day -- not scalping -- and chipping off a few gains. This keeps my head in the game and also makes it more likely that I will be there for any big breaks.

But the advice to trade less is excellent and is often the hardest thing to do. Spending the time working on your trading or researching companies is never wasted.

Tom Wells said...


I'm just getting started trading and have been following your blog for a month or so. It's great stuff. There have been may posts that are very informative and educational for where I'm at. Today's post was exactly the kind of feedback I needed as I've been following the market these last couple of weeks. Getting in has been frustrating and produced more losers than winners. I've stayed out the last couple of days for the reasons you state. Thanks!

Turner said...

I agree completely. I have only taken one trade in the past two weeks (I usually take several trades a day). During these times I just sim trade and research stuff.

heywally said...

Wanted to add to my earlier comment on working on my short game, with small size during this type of market. Specifically, I've been doing chart research on the stock futures indexes -- or SPY, QQQQ if you will -- and am trying to identify the highest % setups for buying opportunities in the first hour of trading, factoring in gaps, pricing, volume and market context of the previous few days. Basically, trying to id places where typically, if the very early selling stops, a short term bounce up is likely. Am also working on trying to quantify this approach in Tradestation.

My version of 'doing less' but still keeping my head in the game.

meques said...

Right. Was hoping to hear from you volume comments and here they go.
Trading only ES, SP500 futures, for one and a half year.
Cause my trading system based on volume now i also cant trade and thats something that really shocked me - never thought volume just can wane so much and for so long.
Was and am searching to find any reasons on this low volume and still cant find.
Looks like, big guys just off for the year. Or just bull have no power to push higher and thats the reason to, one more time, call for sellers coming.
Just hoping it will last soon.