When The Market Is Going Nowhere…

 

 

 

 

 

 

 

 

 

 

I received this question from a member and would like to share with our readers here:

Question:

I paper traded for the past 3 weeks with hedging. It started out profitable until last 2 weeks when I began losing consecutively for most if not all of my trades. All of it came from losses because the prices did not come close to 5% movement at all…and by the 4th day prices were not far from starting price.

I will not go into the details of each trade..but assuming the setup was correct and I did everything right..can you please answer the following questions:

1. Is it true that there will be times when your methods work better than other times? Is that why we were advised to paper trade until profitable again (to ride out this momentum-less period) if we lose consecutively for 3 times or more on real money?

2. In order for the price to make the 5% movement, market has to have momentum. Apparently I was experiencing a period of low momentum. Can you please recommend a momentum indicator / oscillator that I can use in conjunction with the above short term methods of trading so that I can increase my chances of it reaching 5% or slightly less (that’s ok by me!) .

Well, here’s my take. There is no 100% accuracy and accepting losses is part of this business. I myself is about 70% accurate and that is sufficient to give me the best lifestyle I’ve always wanted 🙂

There is nothing that we can do about a market that is going nowhere. There is no crystal ball indicator that tells us that the Smart Money is getting ready to begin moving stocks prices. The VXO, a volatility index, is low so the overall market volatility is low – that is the environment we are in. The volatility can stay low for years so it is a matter of making adjustments in our money management. Let’s review:

I like to trade stocks where the implied volatility or IV is in the high 20’s to 45% or less (when the VXO is low as it currently is) because the stock is at least mathematically designed to move. If after two consecutive trades nothing happens then I will begin virtually trading again waiting for money to begin to be put to work.

I was in CAT on 30 July and my cost was $3.60. The stock went in my opposite direction and I was able to close out the trade at the open on the fourth trading day for $3.20.

I will accept a .40-cents loss any day. I did not take the subsequent setup to the upside on CAT since this was my second consecutive small loss (I would have probably captured my .40-cents loss – go figure). That is the key – two consecutive losses and it is time to virtually trade again.

The reason is that I do not continue to trade and trade expecting to be in the trade when the money comes into the market because in the interim I will experience too many small losses that will add up. The market can experience these “dull” periods and it is only the patient traders that will be in a position to capitalize when the market environment changes.

It is never a matter of being right or wrong it is a matter of the “market is never wrong.