Trading Room – Tue 30 Oct 2018
When the market is in wild swings and persistently sold down by closing near the lows of the day, it shows that the bears are in charge and bulls may have to stay aside rather than fight to buy until the situation is clearer.
Similar to Bursa Malaysia currently, it is clear that the bears are in charge now and the bulls have to stand aside. Many common traders lacking the right information are fearful and confused when persistent selling happens in the market despite them buying at lower levels.
When trading is going badly (for the bulls now), trying harder is often likely to make matters even worse. If you are in a losing streak, the best action may be to step away from the markets.
A short trading break can serve to interrupt the downward spiral and loss of confidence that can develop during losing periods. When trading is resumed, the size should be kept small until confidence is regained.
As they say, if you are out of sync with the market, trading or trying harder won’t help.
Trade smarter, not harder.
When the market is uncertain or in wild swings, having the patience to wait for high expected value trades greatly enhances the return/risk of individual trades.
You should stay on the sidelines and wait until there is a trade opportunity that meets your guidelines or rules of trading.
For conservative long-term traders or investors, placing sub-optimal positions or misguided entries for the sake of entry will tie up capital that could be applied to more attractive opportunities that arise in the future or require liquidating such positions at a loss to free up capital.
Do more of what that works and less of what doesn’t even though many traders violate this principle as they just do not have the comprehensive information to help them make the crucial decisions to trade the right stock/market at the right price level and the right time.
It is quite common for a trader to be good at one type of trade, but later to degrade performance or wipe out their earlier profits by also engaging in trades without any clear edge, due to pure greed, herd mentality, boredom or other reasons.
Elite traders typically know what they are best at and then focus their attention on those types of trades.
Trade only when there is a perceived opportunity or when the edge is in your favour. The desire to make money or gains should be secondary.
Without clarity, many common traders take marginal that otherwise would not have been taken. These types of trades tend to result in net losses and loss of confidence.
As a consequence, the trader piles up losses and waste unnecessary time doing marginal trades and moved further away from his trading target. Traders should only take a trade when the market provides an opportunity as defined by their own individual strategy.
Staring at the screen all day can be an expensive affair and watching every tick can lead to both overtrading and an increased chance of liquidating good positions.
One should always find a more productive use of time to avoid the pitfalls of watching the market too closely.
Do not pile exposure into just a single stock or trade simply because you lack information to act on the others. If there is a holy grail of investing, it could be the power of diversification. Elite traders believe that if assets are truly uncorrelated, diversification could improve return/risk by as much as a factor of 5:1.
Always rely on your own trading edge. As for us, we long ago realise that we need to rely on advances in technologies and move on with the times in striving to deliver above-average performance with ease and near certainty.
The investment world globally today is ruled by quantitative analysis and algorithm trading and there may come a time when machines may do all the work. They already do in many areas in trading.