Maybe our turn to try is coming soon? I am a short term trader myself. However under special conditions I will switch to a “long term” on a portion of my trades.
“When market is rallying – I always feel like I have too little money in my trades”
“When market is tanking – I always feel like I have too much money in my trades”
I learned to ignore that phenomenon and just stick to my trading rules and trade less frequently and smaller in times of market larger shifts.
I received some questions not so long ago on how to invest for a long term at the time when the market was pressing up since the last major bottom in 2009. That was not the time for me to think about “holding long term”. It was the time to sell higher. Now that trend is being challenged.
I am not good at trading shorts. I tried several times and I failed more than not. I am an ok right handed tennis player but when I switch the tennis racket to my left hand – I am awful!
If you read about my preferred setups you probably noticed that I play them from the long side only. I have some trades active almost all the time, and this is no exception. You may see my previous blogs for more information.
I always follow quite strict rules on risk management so my trades had been smaller recently. On some of them I am going to assume a longer “holding” time. I can do that with relatively low risk because I trade broader market ETF. The risk of those to drop additional 80% is close to zero. If that happened however we would have bigger worries than just money in the bank I suppose.
Let’s say an account is invested about 20% of today’s total value. It could be even one and the same ETF widely traded like SPY. Let’s say the SPY drops further 10%. The account like this will go down “only” 2%. With SPY dropping 50%, account like this would be down 10%. That’s assuming no trades are made on the way down!
How many traders loose more than 10% before their stop is hit? I consider the account with 20% currently long the market “under control” (this may not be true if that 20% is parked in a single company stock). If a trader tries to time an entry and hits multiple stops on the way the loss would be probably the same or greater.
If you were caught in today’s market madness you must decide if with your current exposure you are safe and can prevent “selling at the bottom”. You have to make that decision. If you don’t feel comfortable you may need to trim your trades further so you don’t have to panic.
Many large institutional traders are trading with leverage. Money has been cheap recently. Institutions, pensions etc have to invest and keep investing. Cash is not an option for long term – actually cash gives a negative return with today’s low yields and rising inflation. Same is true for bonds – negative real yield. Huge recent selling easily pulls out the leverage.
How low can the market go? I can’t predict, however when I think about how easily the cheap leverage can be removed – the market could go down further.
Good news for long term investors: there is no place currently for huge amounts of cash to get invested at good profit. So eventually it will flow back to the market. The challenge for us traders is to notice when that process starts.
I am carefully trading in anticipation of a tradable bottom (or multiple attempts). I keep in mind that technicals will not be clear in times of panic.
Thus I am using the 5 year weekly line chart of SPY without any indicators with exception of just resistance and support levels.
Panic of longs will be visible with heavier selling. Panic of shorts will be visible with sharp rebounds. Oversold may stay oversold – these indicators do not work well in times like that.
I am on a lookout for any king of positive divergence, after more selling for a longer term long entry in one of market ETFs (like SPY, MDY etc). Good example of such was in 2009 lower low in March 2009 with higher high on MACD.