Opportunities in the stock market today, and this month for that matter, have been sporadic at best.
You may be feeling the end of month pressure to “make something happen.” Don’t. It’s a path that leads to a big loss you didn’t need to take.
Too often we trade our P&L or the calendar. It’s a mistake. “One small trade…” turns into a mess because you were bored.
Good traders lose money on great ideas.
Never forget that. If you want to be a consistent trader you need to risk money on your best ideas. Take a look at your journal and count the number of times you broke this rule.
Trading Discipline is more than Honoring Your Stop Loss
Are you OK with doing nothing? For a period of time in my trading career I wasn’t OK with it. I felt if the market was open I should be trading. After all, that was my job.
The problem with this thinking is it is very unlikely that EVERY DAY your best ideas were available. Long-term success in trading is a numbers game. A good strategy is when probabilities are played out over a large enough sample to allow your edge to play out. As soon as you start taking mediocre trades you mess up the system.
Not only does this expand the number of trades needed to allow the edge to work ( “make 10 good trades so 6 can be profitable,”) but you are messing up the edge with a limited amount of capital.
So discipline and patience also represent:
- Waiting for the best opportunities before you risk money.
- Holding good trades longer.
- trading more aggressively when conditions demand it.
- exiting into momentum instead of adding more shares (when conditions call for it.
Trading the Volatility in AMZN
Scanning for opportunity in the stock market today you can clearly see Amazon.com is on an impressive run. It’s tempting to move into stocks with higher average true range when overall volatility contracts. A fast moving, high ATR stock like AMZN looks great on paper.
There are two problems with this. First, if you don’t normally trade AMZN you are deviating from your plan. You never want to trade a stock simply because it is volatile. You need a reason that stacks the odds in your favor. (you also need to be able to handle the extra risk.)
Second, the weekly stock chart below clearly shows that Amazon.com is in play. However, if you take your analysis deeper into this week’s candlestick, you see indecision at resistance. (we call this a “melted candle'” ).
This is a perfect example of a great stock to trade but it’s not the right time. You can see I drew what to expect, and when the “right” time would be to look for a new entry. Use this example in your universe of stocks to set up great trades and be patient for the risk/reward to make sense.
Click the chart for a larger version.