For six straight months the bulls have been coddled by the market. With every dip being aggressively bought, most bulls have avoided encountering any financial pain. Much to their chagrin the Libya induced sell-off ushered in a change in the market. Over the past few weeks it has changed from a mild mannered, predictable bull to a bipolar drunk. Options trading investors should be especially wary.
Here are five tips to keep your sanity when the market turns into chop suey.
Sit on the sidelines — It seems a thick fog has settled over the market in the past two weeks. Bulls and bears are bumping into each other and neither has established control. Until either group imposes its dominance on the market, it may be wise to park it on the sidelines. There’s nothing wrong with waiting for the proverbial smoke to clear. Remember, in the game of trading capital preservation is paramount.
Reduce your position size — If you are inclined to venture into the market try reducing the amount of shares of risk in the position. If you normally risk $200 per trade, drop to $100. By making smaller bets you reduce your chances of experiencing large draw downs during unfavorable conditions.
Limit yourself to the BEST of setups — Be selective. In the midst of the recent strong uptrend it was quite easy to find clean bullish setups. That’s not the case anymore. The last two weeks have wreaked havoc on most charts making it difficult to find quality entry points. Avoid jumping into mediocre setups just for the sake of having money in the market.
Trade on a higher plain — Getting caught up in the day-to-day shoving match between the bulls and bears can make it difficult to see the forest for the trees. Consider taking a bird’s-eye view by switching from a daily to a weekly chart. Identifying the overall trend and key support resistance levels can bring clarity to the situation. In environments such as this it is often wise to place looser stops around weekly support or resistance levels to avoid getting whipped out of otherwise solid trades.
Trade on a smaller time frame — While the daily charts of the market look a mess, the intraday movement has exhibited fairly consistent trending behavior. Traders possessing the ability to day trade or take quicker profits are likely faring better in this environment than swing traders who hold for multiple days looking for follow through.
Sooner or later the market will break out of this choppy trading range. Until then, consider implementing these helpful tips to increase your probability of success.
Follow Tyler Craig on Twitter@TylersTrading.