I have recently heard a saying stating that the current market behavior can lead to "death by a thousand cuts." This is often the case in a choppy market where buyers and sellers are constantly battling each other, making the stock market tough to trade from either the long and short side. If you find yourself quickly changing your opinion on the short-term market direction, you, too, are part of the battle.
With that said, as the market continues to flail back and forth, here are three important points to keep in mind.
1. Scale down your trading size.
If we know the market is more volatile, we should decrease our average position size for new trades. Though simple, it's surprisingly useful and often overlooked. If a trade begins to work in your favor, you can always scale up by adding to your position.
Try taking your trading size down to half or even a quarter of what you normally trade and build towards full size positions after they become profitable.
2. Have a clear trade expectation.
Once you enter a trade, you should have an expectation for how it will behave. Does your position normally have large price spikes, low volume before pushing higher or random price gaps?
Of course, you are expecting it to work in your favor, but knowing how it should behave and what out-of-the-ordinary price action is will help you better manage the position. If this is not something you've normally thought about, this will force you to pay close attention to price action and whether your trade is moving with added strength or weakness compared to the general market/indices. Also, having a clear expectation makes it easier to realize when you are wrong and, therefore, take smaller losses by exiting early.
3. Always have an exit price in mind.
Going back to the saying "death by a thousand cuts" -- without an exit price or strategy, choppy markets can quickly kill capital even if a trader is reducing their position size. Therefore, when you notice a dip in your personal performance or that your trades are continuously getting stopped out, now is the time to take a step back and re-evaluate.
It is also good to note that this is not the time to change your trading style if it was working before. You could have a great trading strategy that doesn't work as well in this type of environment. That does not mean you need to find a new way to trade. Often, it's best to watch from the sidelines and prepare for when the time is right.
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On this week's edition of StockCharts TV's Mish's Market Minute, the market is miraculously finding some level of support despite the week's volatility. However, in case of a market bottom, Mish shares a multitude of trades to look at with good risk and great reward potential.
ETF Summary
- S&P 500 (SPY): Needs to clear back over 453.29, the 50-DMA.
- Russell 2000 (IWM): Watching to hold current lows as support.
- Dow (DIA): Now needs to stay over the 200-DMA at 344.05.
- Nasdaq (QQQ): Watching to stay over the 50-DMA at 380.
- KRE (Regional Banks): 67.70 next support level from the 200-DMA.
- SMH (Semiconductors): 314 next resistance area. 297 minor support level.
- IYT (Transportation): Needs to hold over 259.38. Resistance at 264.45, the 50-DMA.
- IBB (Biotechnology): With its continued breakdown—needs to find support.
- XRT (Retail): Holding within low of range. Needs to clear back over 93.53, the 200-DMA.
Forrest Crist-Ruiz
MarketGauge.com
Assistant Director of Trading Research and Education
