Markets are pushing to extremes in both directions.
Inducing us to make distress trades and lose money.
Gold soaring on bad news just to retreat again; stock indices around the world making potential recaptures of previous swing highs and retreating sharply; the German Bund writing history with a negative yield.
We know something has to happen, it hasn't happened for a long time: a true breakout, a full-fledged trend.
“This time I'm not going to lose the opportunity.” we say to ourselves.
So we react to each spasm of volatility...
“It's you, my friend, the trend?”
...projecting what could be the next technical target.
But targets keep changing, even seeming to disappear at times.
Rather than a clear cut change in trend, the charts seem to mirror our confused perception.
Liquidity is drying up.
Retail brokers-dealers are cutting margins and bank desks are cutting risks.
And by all measures, we are not yet at peak volatility...
It's not only because of the underlying theme, the EU referendum.
You know that.
It has been like that for a while now.
Besides, the referendum is not a one-way bet.
Now you know that as well.
There is a profound sense of the unknown, where the only thing our sixth sense tells us is that beyond the headlines there are hidden risks liable to start stampedes all over the place.
This is a climate of “fake outs” and whipsaws”.
Far more fortunes are lost in such trading conditions than won. And what if this is the new normal? What if there will be no more trend to buy hands-off in the years ahead?
Who is going to profit?
I've got three answers:
a) Those who don't care about timing the market.
b) Those who infra-leverage each trade.
c) Those who take small profits fast and let losses run.
Now you stop reading. “Kidding me?”
Allow me a few words of clarification for each of the above statements:
a) There is a misunderstanding of time. Most aspiring traders bet on single positions as if they knew the time to enter and exit the market is right. Yet, oftentimes their timing is wrong: the market stops them out and then goes in the direction they initially thought to capitalize on. Except for cycle-based approaches, or unconventional uses of some technical indicators, most trading tools are not made to time the market, yet traders think they can do it.
Try to time the next trade with an oscillator, an ATR, a moving average crossover, a pivot point. These indicators are based on price, most often close price only. There is no element in their formulas which implies a capacity for signaling a time to act, only a price to act upon. And these are the indicators most of us use. So why not develop a trading style where timing becomes secondary?
b) Leverage is a double-edged sword and too high leverage can drain your account quickly. Quickly means with an accelerating speed. The reason is in the mechanics:
When asking what leverage you are using in your trading, you have to refer to the leveraged amount ratio which you are effectively using to enhance your trading strategy: the ratio between the money you have in the account and the value of the trade(s). The value of each trade determines how much is worth one pip. If your effective leverage is too high every adverse pip change rips a large amount out of your equity and adds the same amount to your margin required. In a losing position, with each adverse pip movement, the equity shrinks and more and more margin is required. That is why a margin call situation emerges slowly but materializes in a fulminant way.
c) All else being equal, what do you think is easier to achieve: a 30 pip stop loss, or a 100 pip take profit? Most of the time stops are just too close to current rates to be ignored by market forces. Markets are fed by liquidity, they move because of how orders are distributed along the price scale which is never homogeneous. They don't care if it's your stop clustered at a mere 20 pips distance. Invert the situation: put your targets at a distance the market will probably grab it and place your stops at a prudent distance so they don't become easy food. From here, manage your entire equity instead of managing a single trade each time.
Stop. Read this tomorrow again.