Three New Trading Rules You Should Be Following
By Jeff Clark
August 12, 2008
Now you know why there are a lot of alcoholics in the trading pits.
Even my teetotaling Aunt Edith would have taken a slug out of the cooking sherry bottle after last week's schizophrenic market action.
The Dow dropped 40 points on Monday, rallied 350 points over the next two days, declined 230 points on Thursday, and then exploded 300-points higher on Friday.
"You must be making a fortune," a friend e-mailed me on Sunday night. You see... it's often assumed traders love this type of volatility. But we don't.
It's tough to trade a choppy market.
Traders love a trending market. We prefer to spot an early developing trend, take a position, and then hold on to it for days, weeks, or even months before cashing in on our fortune.
Trading a choppy market – one that gaps higher or lower and reverses direction nearly every day – is a lot like trying to talk religion with a Presbyterian Rabbi in Jesuit school. Nothing makes any sense.
But that's the market environment we have now. And traders need to adjust.
We've made some changes in my trading newsletter, the S&A Short Report. We've tightened up our stop-loss parameters. We've narrowed our focus to specific types of trade setups. And we've reduced the profit potential we look for on any given trade.
In a trending market, I like to hold out for a double on any trade. We've had a lot of 100% winners over the years. Heck, even this year we're still averaging about one double each month.
But in a choppy market, traders have to be willing to accept something less than 100%. When an option position shoots up 50% or more in just a day or two, you have to be willing to cash in a few chips. Otherwise, the choppy market will take the gains away from you.
Don't get caught up trying to sell at the maximum potential profit. The market gods won't let you do that anyway... They'll laugh as they turn your winning trades into losers.
The best way to navigate a choppy market is to tighten up your profit expectations. Be willing to cash out a little quicker.
You won't sell at the absolute best possible price. But you'll do a heck of a lot better than the alcoholics in the trading pits.
Best regards and good trading,
Jeff Clark
