Married men know how to adjust. Ask any man who’s been married more than a couple of years and he will tell you that it goes without saying that his approach and manner must instantly adjust when he walks into the door and sees his partner’s mood. From this rapid situational adjustment traders can extract valuable lessons. It has been said by some that the market is a “harsh mistress”. Her capricious moods require constant vigilance. Match her moods, and your trading is blissful; however, to ignore those moods is to risk peril. With apologies to those who might get hung up on the sexist metaphors, here are some ideas presented in context to help you recognize how to adjust to the market’s mood.
Buy Her Flowers When She’s Grumpy
An excellent way to adjust to market mood swings is to adjust your exit strategy. When the market is more volatile than usual, it typically means that the market is in a town trend. A grumpy, down trending market is characterized by several volatile swings. Up one day and down the next, it becomes increasingly difficult to know just how much tolerance is required for any given trade. Instead of expecting the market to pull out of its doldrums, you should make the best of the good times while you can. Take conservative profits on trades when you can get them and be prepared to trade in the opposite direction, or stand aside, shortly after you have taken profits. This kind of strategy is more likely to help your trading account blossom in times of volatility.
Celebrate the Good Times and Patiently Wait for More
When the market is in a bullish mood, volatility tends to decrease. In such times the market advances more steadily and patiently. During these times it is appropriate to use a trailing stop and allow the trend to run as long as it will. Each time you move the trailing stop higher in your favor; you celebrate the advance and capture the gains. Using a trailing stop keeps you from putting limits on how far the trade can advance. In the same way that you do not know when the market’s mood may change, you also do not know how long the market’s mood will remain the same. Even so, in less volatile times, the risk of reversal is reduced.
Consider this example that compares recent action on two ETF’s. PowerShares QQQ (QQQ) is one of many ETF’s that have demonstrated a grumpy mood lately. SPDR Gold Shares (GLD) on the other hand has been a Friday-night Katy Perry by comparison. In the graphic below notice how a trailing stop trade on GLD would have yielded significant profits where several quick profit trades could have been made on QQQ. Each of the blue lines in this graphic represents a place where you could have entered going short on the break of a new low and simply set your stop loss at one dollar and your profit target at one dollar as well. This strategy would have yielded six profitable trades and only one loser. The trade on GLD has a 4% trailing stop. In a bullish market a 4% trailing stop may be rather tight but can yield significant gains when the stock or ETF you are trading makes a good run. As shown here on GLD, one single trade captures the best part of gold’s recent meteoric rise.
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