Trading Slow Market Conditions

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Trading slow market conditions

Synopsis:

Historically, the majority of trading markets are bullish and the vast majority of what is left is bearish. But what about those times though when the market is going sideways? It is critical that traders manage risk in these time periods correctly so that they don’t give back all their earnings that they’ve made. Here our traders discuss avoiding getting chopped up in sideways markets

Full Transcript:

Moderator: SizeTraders, how is it going? It’s Amos here with Gary, head trader at SizeTrade. Gary, thanks for being with us today.

Gary: Hey Amos, how’s it going?

Moderator: Good good. Market’s been a little slow lately. I just wanted to ask you today, how do you suggest traders cope with this type of market conditions? What can a trader do?

Gary: Yeah, it’s actually a good question Amos. I’m glad you pointed that out. We, as day traders, when we day trade, we have to take what the market gives us. There’s an old saying in Wall Street that says: ‘’Bulls make money, bears make money, pigs gets slaughtered.’’ I think a lot of the traders in the last 15-20 years, because there has been relatively high volatility in the markets, have not understood the pig’s side.

Yes, bulls make money and bears make money, that’s great. Actually, bears probably haven’t made money in the last five years or so. ‘’Pigs get slaughtered’’, what does that actually mean? That means that when you get complaisant, when the market is not giving you an opportunity to make money on the upside, it’s not giving you an opportunity to make money on the downside and it’s staying in a tight range like we’ve seen over the last two or three weeks, you get slaughtered if you try to trade it. There have been tons of false breakouts and tons of false breakdowns. When you chase those breakouts and breakdowns like we would normally do in a bull and bear’s environment, you get slaughtered.

So, just to give you an example, the market broke on the 2260 and went to the lows 2250. It actually looked like the market was going to break down. Wrong, that same day we rallied back to the 2260 and the next day, we were in the 2270. It looked like the perfect reversal day. You had a false break down, back into the range and the next day, you were touching the top of the range breaking out. And again, all of those people got short the day before and got crushed. All the people who got long that day got crushed because we went back down to the low 2260.  I think we even went to the high 2250. So, the point is that a profitable trader, particularly a day trader, but a profitable trader in general is one that is able to curtail the amount of time that gets chopped.

So I remember when I first started out day trading, they told us: ‘‘hey, trade the open until lunch and take off lunch between 12:00 and 2:00. Then, come back at 2:00’’. I didn’t understand that because, I thought, if day trading is not luck, then every trade I do should have a high probability of me making money since I’m a profitable trader. But what I didn’t realize and I learned over time is that, during that time, there are no opportunities to take advantage of; that my strategies would only work when there was opportunity to make money. So let’s take Eagle for example.  If we’re looking to make 6 points and the market only moves 10 points, it becomes very difficult to catch that 60% that I move. On top of that, a lot of times, you’re not going to catch the top or the bottom, so you kind of catch the middle.

So, if you’re moving 10 points, the middle point is 5 and the numbers don’t add up. If you push yourself to make money in this type of environment, you’re going to get chopped up. That’s what the whole point of ‘’chopped up’’ is. And, you’re going to give back at least one month, potentially a few months, of your profitable trading. Now, the question: is that’s okay? If you are trading breakouts and this is what you do; you trade breakouts and nine months out of a year, you’re crushing on breakouts and breakdowns, you make a thousand SMBM points throughout the year and you give back a hundred, 10% drawn out, that’s great.

The problem is that’s not what usually happens. What usually happens is that the trader will give back 30-40% of his profits in one month because he’s trying to chase these breakouts and breakdowns, he’s reading the news and he’s becoming a fundamental trader: ‘’ Oh look, this happened and Donald Trump said something bad, the market crashed…It’s going to crash, it’s going to crash’’ and then of course, it doesn’t matter because it was news that people knew anyway, and it doesn’t really affect longer term trading habits. So the key is, if you are going to build a strategy from scratch, you have to decide; are you going to build a trending strategy and it’s going to take advantage of trending trends or are you going to build a scalping strategy that is going to take advantage of a scalping environment, an environment that’s rage-bound.

Typically, people try to build trending strategies because the market trends 70-80% of the time out of the year. So, building a scalping strategy for 20% of the time is tough because you have to sit on your hands for 80% of the time.  When you’re building a trending strategy, which I feel like the majority of profitable strategy builders build, you get into an environment where you make money or you have action 80% of the time. Then, 20% of the time, you either sit on your hands like we are right now, not putting many trades on, or you give back, but the amount you give back is reasonable or justified compared to the time you make 80%.

So, I’m actually happy that we are positive for, I believe, 7 points for the month, which is not anything to rave on about. But, I’m happy that in this type of environment, we’re not giving back money like so many other people that I’ve spoken to have, and it’s unfortunate. I wanted to bring this out so that if you’re trading strategies on your own, you have to be comfortable with understanding that we are ready to bind and sometimes, the best trade you do is the trade that you don’t do. So, it’s okay to miss two or three weeks of training because eventually, the market comes back.

This is what is going to happen every year no matter what. Will it happen in the first two weeks of January? Probably not. Will it happen in the middle of August? Most likely. If you take a sample of three, four, five years trading, will this happen? Will you have Augusts that are not slow? Yes. Will you have Januarys that are not fast? Yes. So it all evens out at the end. As long as you don’t get crushed or give back a lot of money in these types of environments, you’re actually ahead of the game because you’re going to make it back when the market might be a little more active then different other parts of the year to make up for it. I’m not saying that it will be.

Moderator: So Gary, we know that risk management is really the fundamental foundation of being a profitable trader and I think that’s what you’re touching on here.  It’s just being able to manage the risk properly. So what is your suggestion right now for traders? If they’re building these trading strategies, how do you know when you can start trading those trades again?

Gary: Again, every strategy is a bit different depending on what you’re looking for. If you’re looking for 50 points, it’s a bit different then if you’re looking for 6 points but right now, I think you clearly see that the market is closing in 2260 every single day for the last two weeks.  I’d like to see it close above or below there. I’d like to see not a slight close. So, not 2259 or 2271. I’d like to see maybe a low 50 close, hold that area, not see a bounce back into the 2260 level, and maybe even trade a tad lower. I think then, you feel comfortable putting on trades again because you’ve broken out of the rage, and you can chase the market a little bit to try to make money on that as a downside or an upside. I’m not predicting which way this will resolve itself.

I don’t think anybody knows. If it happens to go higher, great, we’ll make money. If it happens to go lower, great, we’ll make money. The key is to make sure that you figure out what the range is. Right now, I think the range is pretty simple. It just seems to be 2260 closes. Anybody who gets ahead of themselves when the market is in the low 2250 or mid 2270, I think is taking a big risk. You might be right and it might be the time that we break the range, but the historical evidence of the last two weeks says that you’re probably going to get chopped up as it goes and overshoots to other directions.

Another signal is when you have a false breakdown. The next day, in a few days or even the same day, you’ll have a false breakout and when you have a false breakout, the next day, you’re back in the range of the false breakdown. So right now, let’s take Friday for example, we reached 2270 and 2250 slightly and for a short time. Then, we closed in the middle of 2260.  So if you had bought the breakout because you thought: ‘‘that’s it! It’s inauguration day. They want to take it higher’’, you got hurt because it went back down out of the 2260. If you shorted the 2250 because you thought: ‘’ Oh! That’s it, we’re breaking down. He said something negative and the market is not happy’’, you also lost money because it went back to the 2260. That’s part of the chop; long or short, you get hurt either way.

It’s not that you are wrong, sometimes you get short to market because you have either technical patterns or fundamental patterns that tell you that the market is going to go down, and you were just flat wrong because the market goes up. You get out and you take a loss. It’s part of your strategy. Then, you get long because now you think the market is going to go up and you make it back and more. This is vice versa; sometimes you think the market is going to go up and it goes down. It just happens that you’re wrong. The problem with the chop, the sideways action and being a pig is that you can’t make money long and you can’t make money short.

It’s not being wrong about the direction of the market, it’s being wrong about that the market will actually have a direction. So I was just saying that the old mantra rings true to this day, which is amazing. If you make money when the market goes up, that is great and if you make money when the market goes down, that’s great. There’s a tons of opportunity to make money when the market goes up and down. We try to take advantage of every single little bit of that.  But, when the market is sideways, you just have to be cautious or you’ll get slaughtered.

Moderator: Gary, thanks so much for your time. We’ll stay tuned and as always, SizeTraders, subscribe. We’ll keep you updated. Until next time, Gary! This is Amos and we’ll be in touch. Thank, Gary.

Gary: Thanks a lot! Take care.

Moderator (Amos): Take care, bye.

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