The Markets October 2008

Yikes! This has been the most amazing 2 weeks of volatility! Sounds exciting for traders, right? I happen to disagree. If you are a gambler, sure it's been a roller coaster. But any of us who are trying to make a consistent living trading are not playing right now. I haven't made a trade in over 2 weeks, and I won't again until the markets settle down a bit.

I follow a very conservative system of trading that uses a very simple template. Long trades happen at resistance, and short trades at support. The stock has to sit right below (for longs) or above (for shorts) the number and volume needs to pick up significantly. As soon as the price crosses the number, I place my trade, with an accompanying .3% stop loss. If the stock gains .5%, I move the stop loss to within $.03 of the number. Once it gains 1%, I take half my stake out. If it makes it to 2%, I take half again out, and replace the stop loss with a 1% trailing stop. If it makes 3% I will take half out again, and then just let the remainder ride, or stop out.

As you can see, this system doesn't allow for volatility. A simple reversal of .3% at the number stops me out. Even worse, the way stocks are swinging back and forth these days, that .3% can see some significant slippage. What happens if I place a buy at $50.01 with a stop loss at $49.95, and the stock price crashes 2% quickly to $49 before my stop loss can be filled? That kind of slippage could mean a 2% loss despite my .3% stop loss! That's not capital preservation, it's a formula for bankruptcy.

I would rather sit on the sidelines for 2-3 weeks than make a couple of mistakes that each cost me 2% of my capital. Sure, the exact opposite could happen and I could see a quick 2% gain, but that's not how you make consistent earnings. Anybody who wants to make a living daytrading needs to preserve capital above all else, and make smart trades that work consistently.

For that reason, I'm currently on vacation!