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Night Terrors

Discussion in 'Shares' started by Tropo, 10th Jun, 2010.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    Tate on Trading - Night Terrors

    Recently on the mentor program, we were having a little chat about the current state of the market and what one should do when the market behaves as if it is having some sort of seizure.
    However, before beginning this conversation it is worth noting that most traders believe that they absolutely have to be in the market all the time. It is as if the very thought of missing anything that the market does will bring them irreparable harm.
    I have to state at the outset that this is a childish and amateurish view of the world of trading.
    Success in trading is based upon defining those times when the environment is conducive to profitability. As such there are a few techniques you can add to your trading arsenal to skew the odds a little in your favour.

    1. Your sleeping point.
    There is a somewhat apocryphal story about JP Morgan’s advice to a young man who worked for him. This young man approach Morgan regarding his portfolio, which was not doing too well.
    Its performance was so poor that he couldn’t think of anything else, he couldn’t eat or sleep because of the worry his portfolio was causing him. Morgan’s advice was “sell to the sleeping point.”
    All traders have a pain threshold and this pain threshold is linked to their perceptions about the market and their performance within the market.
    The simple way to remove anxiety regarding an instrument is to sell it until the point at which you can relax.
    For example if you are waking constantly to check overseas markets then clearly there is something wrong either with your system that it requires such attention or your risk profile is so skewed that you are carry too much risk to survive even minor perturbations.
    If you wake up thinking about it or you are terrified to hear what the overnight figures are, lest you suffer some financial calamity of your own making, then you have to extract yourself from the market and start again.
    If there is a loss to be taken, take it and start again.

    2. If you do not understand it, get out.
    The current market is causing all sorts of problems for traders in that prices are reversing on an almost daily basis and at the time of writing this the trend is very uncertain.
    There is undoubtedly a wide range of macro factors as to why these events might be occurring and there is no need to understand these factors since the additional information does not add to your ability to make decisions.
    However, if price action is behaving in such a way that you do not understand, then this is reflective of a lack of coherence in the underlying investment sentiment.
    Money is made when all the ducks line up and the market trends – if the market's most basic participants cannot understand what is happening then you will get no coherence and therefore no trend.
    In such case stand aside and wait to let things settle down.
    This is important because it needs to be remembered that the person with the most money at the start of a trend wins and this person is the one which has preserved their capital the best.

    3. What does the system say?
    This is generally a hard one for most people because they do not have a system.
    Your system may have a rule that encompasses points one and two above but it may also have a technical tool that looks at market volatility and makes judgments regarding an acceptable level of volatility for trading.
    There is an old maxim that traders like volatility which is a somewhat inane statement that was probably made by someone who doesn’t understand that trend and volatility are not the same thing.
    Traders like a trend - we do not like markets that swing wildly from bullish to bearish and back again within a week.
    Therefore, it is necessary to have a tool that looks at relative market volatility and make a call as to whether you perceive the market to be too volatile to trade and whether there are better opportunities elsewhere.
    Such a rule is so important that it is one of the first technical parts of the mentor program and is a tool that Louise uses to great effect.

    It is not always a great time to be in the market. The old maxim that there are old traders and bold traders but no old bold traders is in many ways true. Survival is the key aim for all traders since if you have lost all your money you cannot play and if you cannot play, you have no hope of being profitable.
    If something is happening that you are uncomfortable with, then simply withdraw - the market will be there when you get back.
    - Chris Tate