Getting Whipped at The Swingers Club

We often talk about the pitfalls of being stubborn on a trade. Pesky emotions, pesky ego, keeping you from dropping a loser because you have gone and convinced yourself that this stock is worth a billion dollars and you don’t want to admit that you were wrong. Many of us have had to learn this lesson the hard way, multiple times, taking enormous losses over stocks we were sure would go higher. Some even added to their positions as their snowball rolled downhill becoming a larger snowball with a greater loss. But being stubborn can hurt a trader in other ways too. Continuing to trade with a tried and true style that has stopped working in current market conditions can have tragic results.

Swing traders are struggling. If you are a swing trader, you know what I am talking about. The only way you may have avoided this in recent months is to have avoided trading.

You and I are not the only ones having trouble, of course. I just read a note on equity strategy from Citigroup that talks about under-performing equity hedge fund managers who, like the rest of us, are finding it difficult to adapt to a market with no trend. Ideally, we want to find a trend, hop on it and stay on it for several weeks to months, banking egregious amounts of coin, but it simply is not working that way at the moment.

To quote the note, “Fund managers are unhappy. The median global long only equity fund has underperformed this year. The average long/short fund has lost money. It seems that many investors are finding it hard to adapt to trendless markets. Indeed broad stock price indices have largely moved sideways this year, return spreads amongst the sectors and regions have evaporated and price momentum strategies are fading.”

Momentum traders are seeing their positions start out positively only to see them fade within days, hours or even minutes of taking the trade. Many traders are finding themselves dumping losers with 5% losses or more that had started out as winning positions. This brings me to another point, selling is the name of the game. No matter what market you are in, if you can’t figure out when to take profits, you will never make money. Taking a 5% loss on EVERY trade will eventually bleed you dry.

But this is a market that only gives those profits for a day or two and many traders have difficulty changing their style. They don’t want to become…ewwww, gasp, cough, cough…DAY traders. The very thought leaves such distaste in some traders’ mouths that it is akin to being trailer trash. This is the trader who cannot bring himself to take profit within a day of placing a trade.

Unfortunately for us, the analyst who wrote the Citi note does not believe the trendless market will change anytime soon; hopefully he is wrong. But at least he doesn’t expect a continuation the down draft of the past seven weeks saying, “We think investors will have to get used to trendless markets. It is typical at this stage of the cycle, when stock prices Grind Higher with EPS.”

Grind higher? Well there is some good news, if it sticks. It would be nice to at least have a market that grinds higher with EPS. This would definitely be an improvement on seven weeks of dripping lower amidst a lot of indecision. The writer goes on to say that trends can be found in the trendless market and gives his opinion as to what those might be. Finding a trend where one does not exist is no easy task. The current market conditions require the trader to adapt, be nimble … maybe even change his/her style a bit to trade what the market is giving.

The other option is to stay out of the market. This is a perfectly viable option. There are many traders who believe strongly that we should wait for the right market environment. Our old friend Danny, aka: Spyder Crusher, has a market timer to tell him when the environment suits his style or not. This is great as long as you have the time to wait. But it could be a long wait of not just weeks but months at best and years at worst, so the trader must have enough capital to comfortably cover expenses for that long and still survive.

I am not currently in a position to wait that long, so I have to adapt. It took 6 of the last 7 weeks for me to finally figure out how to trade the market we are in, but I had a profitable week on the 7th consecutive down week of 2011, thank goodness, and I did it by adapting and taking profits early.

In this environment, I have decided to take a third to half the position’s profits on the first day…as soon as I have them. Any position that does not give me some profits on the first day, gets dropped before the end of the day. And all swing trades are no bigger than half size giving me a large cash position at the end of each day. Each swing trade gives me SOME profit and I don’t risk turning an initial winner into a complete loser because I have locked some profits in. It’s working….for now.

Each trader can only decide for himself what is the best solution, but one thing I can tell you: if it isn’t working, change it. Face the emotions that plague you and stop being so stubborn. And above all – Good Luck Swingers!

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