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“Active and successful traders become frustrated when pet markets act dull, won’t move, or trade sideways in range-bound continuation patterns. These
are the times to tighten stops and avoid losses, but more importantly do not
open any new trades. Just wait and do nothing but watch.” –Traderrog
Two old trading axioms we always remember are “Choppy markets will chop you up” and Jesse Livermore’s famous quote about how he made most of his money just waiting and watching. Keep in mind roughly 80% of trading time for most markets is moving sideways into range-bound nothingness. None of us but a handful is so smart as to avoid some sideways trading but we shouldn’t deliberately install new trades into continuation patterns either. Exceptions would be to install new buy-stops or target opening trades that might go long or short at higher or lower price points coming out of continuation rectangles and triangles.
Smart traders pick their spots with great care and avoid being in some kind of trade “just to be trading.” We’ve mentioned it before but some of the all time great trades in modern history were prolonged events with their owners being passive trading managers not actively piling on more or taking off positions.
Scaling into a trade is a good idea and we heartily recommend it for traders budgeted to install 50 contracts, for example. Things usually work better if you can make an entry first into ten contracts and then watch the market action. If your ideas are confirmed, then add 10 or 20 more. Subsequent market moves will tell us to keep adding or halt and watch the progress. With 20 or 30 contracts in place and charts remaining positive we could load the boat, install new stops and pay attention.
It seems like every time we leave the office to attend a conference something serious happens in our markets. We either miss an opportunity or something that’s open misbehaves. Sharp traders with strong open positions will tighten stops abnormally if they are absent or cannot pay close attention. Others, many of them good planners, schedule trips and vacations around prospective trading action, if possible. They go away when they know historically things are flat or quiet. Traders often close everything out or avoid new trades at all and leave with peace of mind knowing that if everything erupts when gone that’s fine with them.
We are seeing more of our new readers to Trader Tracks ask about trading ideas
while sending us long lists of their open trades. Our first reaction is how can one person possibly monitor all that stuff and maintain control? One trader showed us seven single spaced pages of open trades. How can they manage this much work? The answer is they can’t and are often marginally out of control. This is usually an accident waiting to happen, setting up a trader for trouble by over-trading.
On the other hand, if a trader is active in only one or two markets, using multiple contracts is a better approach as there is much less to observe and control. You can just as easily maintain trade management on one contract or 50 more that are identical. If you want more horsepower in your trading and your trading budget and account can reasonably stand it, this is a better way to trade. Others will say diversity is better. They think if one market dies the others will hold things up. We say diversity when taken to extremes is a formula to lose money faster. The more dissimilar trades to manage, the more ways we have to lose. This is not our original idea; Warren Buffet preaches on this topic as well.
Frequently in the Chicago trading pits, traders often refer to each other by their specialties. He does grain, she trades currencies, he is an energy specialist, or she trades the S&P’s. These people are pro traders and fully understand they cannot be all things to all people so how can the outsiders, us screen traders,
I often think of the guy in New York who has an edge trading S&P’s. His plan had to do with price changes at 2pm on each trading day. He would either be long or short or out on this trade being active for about 10-20 minutes each day. Many days he watched and did nothing which is the point of today’s essay. This man has become very wealthy by using this one trade when he spots his proper set-ups. Must be nice to work an hour a day and become a millionaire. The trick of it is to spot an edge and use it carefully and regularly.
If you do not see the right technical and fundamental set-ups in your favorite market, just leave it alone for the day. Trading on hope or fear will cost you money. Do not try to hope your way into a trade and be sure most everything in your indicator package is moving to your advantage. Even then after an entry, use stops and watch progress like a hawk. We have seen some top notch traders put on a position and with no movement toward their expectations right away, exit the trade. Some of these guys have strict time tables. Shorter ones might be only a few minutes. No movement, no trade, I am out. Then they watch and wait for another spot which may not show up again for hours or even several days.
Some years ago I opened a silver futures trade that seemed like a sure thing. I assure you in this business nothing is a sure thing. Anyway, the silver prices didn’t move much in either direction and it almost seemed as if the market was frozen or had seized up. I called in an exit after watching this nothingness for about 30 minutes. Silver is usually faster and if responses are slow to arrive something could be wrong. In this example, I escaped in the nick of time and had been long. My exit order was executed and silver dropped like a stone losing 20 points. Later on my broker asked how I knew and congratulated me on the decision. I told him I wasn’t being brilliant and did not know anything except the market acted funny and wouldn’t trend in my direction or at all for that matter.
On another silver trade, a long position earned $1500 per contract and I bailed out fast. The broker again asked why as he could not see anything technical to make me sell. My answer that time was this: (1) I knew from experience in that era that silver traders almost automatically took profits on a good fast trade at $1500. (2) Next, while we had not hit a higher resistance point as yet, we were approaching it and the smart ones do not wait for a resistance price touch but rather escape with a quick exit just before the price touch is hit. If you trade silver futures which can be fast and dangerous you would see what I mean.
Specials Times to Avoid Trading
Obvious times to avoid trading are near contract roll-over dates, special holidays, during expectations of special announcements and for many the weekends.
We like to recommend junior precious metals and energy stocks.Those equities are most often better served with wider stops or no stops; particularly when a stock junior is under a dollar, being just a few pennies. Fills and sales on those can be a disaster unless you are tough with prices both going in and on the exits. If you had a neat rally run, and made say 50% and seek to cash in, the rest of the invested gang may have the same idea. What kind of a price do you think you’ll get on the exit with a thin number of buyers and loads of sellers? It will not be pretty.
This is the reason planning a trade can help greatly. Expect to sell your
junior stock when the price is moving up into strength. This one hurts as it appears you are giving away more profits while this little beauty keeps on rallying. However, if a very obvious price resistance point is approaching, you can take a pre-planned stated price goal and simply bail out before the crowd. Your exit fill will be infinitely better selling into strength when buyers want your stock.
We have a new junior oil stock which appears to be very promising. All the right stuff is on the table and everyone in the game is predicting a gusher. However, what happens to the stock if the first hole comes up dry and those rosy forecasts are flattened?
Our strategy on this one is as follows: (1) our stock entry price is roughly ½ below the former recent high. We plan to own the stock right to the +100% gain level and then exit before the drill results are even posted to the news. Immediately, after that early sale and we pocket the 100%, we install a new buy-stop entry to be implemented at a price just above that resistance at the 100% gain.This way we are out with profits whether the well comes in or not. And next, if the oil well is successful and price rises, it runs into our buy stop somewhat above resistance.
We are first trading the eager expectations of the stock from half price to near resistance and just before the drill results come in. If the hole is dry our buy stop is never hit and we are on the sidelines. If the well fortunately comes in and the price rockets up, we get an automatic buy fill as the rising share price hits our buy-stop. If you try to bail out on news the well had failed, guess what your price will be?
Many of the same strategies are employed with stocks and futures-commodities. Most but not all strategies apply to both market sectors. Futures traders prefer futures and commodities as the sector is ordinarily faster. In some cases,
stocks can move just as fast but normally the junior sector is notorious for difficulties in obtaining the right prices going in and coming out. We know of one stock that came on very quietly for under $.05 per share. This was an obvious high risk flyer if there ever was one. The story was excellent and it attracted some big time traders who all bought in. Today, the shares are trading near $3-$4 and they not even listed yet but should be this summer. It’s all a private club at this juncture. Those kinds of trades are better served most of the time with no stops; just buy and hold until you have reached your objective.
We have followed an outstanding professional trader, a woman, whose skills are truly exemplary. Most of us could only hope to be 20% as good as she is. Whenever she is interviewed or has a posted essay, I take the time to read and listen carefully as she absolutely knows what she is doing. I have heard her remark upon taking a $500,000 loss trading S&P’s say with total calmness, ‘we’ll earn it back next week’. This would give most a heart attack but she not only talks recovery but will do it and not be concerned. That is true confidence and trading power. Most important of all, this is her personal money and not the funds of some institution where a trader does not get personally burned-off in a big loss.
The point of my talking about her trading is this: She has told the trading audience the markets are much faster now with super-dooper computers and program trading. She is always studying her trading patterns and says today, traders should take a smaller bite of the apple and be content with smaller gains on each trade. In back testing she has found striving for her formerly larger gains per contract is not working net-net on the bottom line. She suggests traders have smaller goals and perhaps we should trade more contracts (multiples) on each trade. After checking the stats this plan works better for more profits in her trading plans. We have noticed similar indicators but when this lady says it’s true we know it’s a fact. Keep that in mind and trade for solid gains not expectations of wishful larger ones.
We recently issued a trading alert for our readers to temporarily sit on the side-lines for numerous reasons. Several are seeing set-ups they like and are chomping at the bit to re-enter certain markets. This week several major international markets are closed for holidays. Some are closed for the entire week and others part of it. We gave our readers a longer list of other reasons to stay out for awhile to wait and watch as a major inflection point seems to be approaching.
Very soon, perhaps next week on May 8, we will find out if my forecast is correct. Do not trade or invest just to be in the game. Have real concrete reasons to trade. Our star lady trader looks for set-ups, sets a trading goal and uses solid entry and exit price points to construct a win. She doesn’t care if she might earn more by staying in trade. She will take the earned profit goals and get out. So should you. As traders we are always learning and must do so to keep up with market and sector changes. Just keep in mind a good part of the time we ought to be on the sidelines learning and watching, not being in going-nowhere trades that could eat
our lunch. –Traderrog
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Roger Wiegand is Editor of Trader Tracks Newsletter and his soon to be opened Daily Tracker for active gold, silver and energy traders. Roger provides recommendations for short and longer term trading using stocks, futures and commodities with specifics.
Contact Claudio Bassi, at Trader Track’s New York City publishing offices for a trial subscription. Call 718-457-1426 Monday through Friday, 9:30am to 5pm or, e-mail cbassi@miningstocks.com
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