Home > Lessons from the trading floor > “How do I trade this market”?

“How do I trade this market”?

The curent market environment we are now trading in is one that has not been seen since the the 1920’s. Until we realize this as traders, we will be frustrated with our trading systems.  The volatility is great if you understand how to trade it, however if you are only relying on technical analysis you are going to face a difficult task until the fear in the markets disipate.  Of course, you want to use your charts as a guide, however, much of what is going on right now is momentum based.  Similar in some regards to trading during the internet boom of the late 1990’s, but different because at that time the momentum was mostly to the upside.  We will use our daily charts and our 30 minute charts to see the underlying trend, which at this point is clearly down, however, because we are so far stretched from the 50 day and 200 day moving averages on the Dow, we can only expect sharp rallies, which then ignites short covering.  These rallies are then short lived because hedge funds and institutions see these rallies as an opportunity to unload their shares which they have to sell because of client redemptions.  All this ultimately leading us to the violent gyrations in both directions.

So how do we trade this?  Well, because the underlying trend is down, the majority of our trades will be from the short side.  Like the institutions and hedge funds, we will sell the rallies and get short. Because the market does not go straight down and we do have the violent up moves, we are always “working our position”, covering some shares into momentum on the way down.  The common mistake for alot of traders is to think that the down move is going to go straight down and they try to hold the stock to make a point , when in fact all that was there was .50.  We must cover when we can, not when we have to.  THe rallies are so sharp and unforseen, that we would lose all of our profits if we did not book them into momentum.  There is also an opportunity to ride the momentum back to the upside and get long and ride the short covering. When we make this sort of trade, we know that is a contra-trend trade or against the trend so we know to book profits even sooner because it is just a matter of time before the “hedgies” and institutions start selling again.

The fact of the matter is that these are not easy times, but they can be profitable if you adapt and stay disciplined. Trade less share size until you get comfortable with the market conditions and do not rely strictly on charts. They are just a part of the equation.  Good luck and please let us know if you have any questions.

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