I have quite a few questions & inquires from over the weekend that I will reply to asap, no later than the end of today. Thank you for your patience. I might also be a little behind on replying to questions & comments this week as I plan to set aside some time going through the charts looking for any new trading opportunities that standout. The first half of April was marked with sideways trading in the broad markets while market topped, then moving lower in that well-defined descending price channel recently highlighted on the QQQ 60-minute chart. The first half of May has so far been a repeat of the first half of April with prices trading sideways which I can only image has frustrated both bulls & bears alike. Keep in mind that this sideways trading action works in the favor of the 3x leveraged sector ETFs which were mentioned as attractive shorting opps last month. Trading ranges don’t last forever and so I hope to find some trade ideas, long and/or short, that look to provided attractive R/R profiles with the most promising setups to be added as official trade ideas this week.
Changing gears, I figured that I’d share my reply to this set of trading related questions that I received over the weekend as I’d image that others might have similar questions (any personally identifiable information commented out):
What would be a sensible strategy for managing a trading account when things get active on the decline? Looking for some general rules of thumb or insights from your experience last bear market for cycling into and out of trades both long and short.
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Typically, I like to use a scale in approach when positioning for what I expect to be a significant rally or correction (change in trend). For example, if the markets are climbing within a bearish rising wedge pattern when the charts indicate a correction that is likely to last for weeks or months, I might start scaling in near the top of the wedge (around 65-75% towards the apex) and/or at key resistance levels where prices might reverse. I’ll typically wait for some pretty decent evidence that the bearish scenario is starting to play out, such as a breakdown below the wedge, a successful backtest & impulsive move lower off the wedge, a break of a significant support level(s), subsequent back-tests & reversals off those broken support/now resistance levels, various trend indicators rolling from bullish to bearish, etc…., at which point I will have likely taken my final allotment of short exposure.
On a related note, when position for a correction (more so than a rally), I often close out the bulk of my short positions in relatively close proximity. That is a function of two things: 1) I’ll usually book profits on shorts when the market is approaching one of my target levels while divergences, volume patterns, & other things are indicating that a meaningful bounce is likely. 2) Not by pure coincidence IMO, the price targets on my swing short trades are very often hit around the same time that my price targets on the broad markets or a sector are hit.
Stocks tend to fall much faster than they rise. As such, with the market often slowly rolling over at a top, I often scale into a portfolio of swing short trades yet with reversals after a sharp sell-off often being very sharp & swift, I will often aggressive close out swing shorts in close proximity and/or take long-side trades for an expected bounce or to hedge any remaining shorts if I’m not very confident of a reversal.
Regarding the primary trend (bull & bear markets), it all depends on one’s trading style & typical holding period but for the less active trader just trying to capture the bulk of the major trends, I would suggested focusing mainly on the daily, weekly & occasionally the 60-minute time frames while ignoring any bullish or bearish developments on any of the shorter-time frames. Once the trend is clearly established (btw- we’re close but not fully to the point where we can say without a shadow of a doubt, that the primary trend is bearish), then one of the main things that I look for to move from a bearish/net short market positioning to a bullish or net long positioning would be positive divergence on the daily time frame & often on the 60-minute time frame as well. Positive divergences on the weekly chart often precede major (primary) trend changes (i.e- the end of a bull or bear market) whereas the daily & 60-minute divergences often precede the multi-week or multi-month ”tradable” counter-trend rallies.
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For example, how many active trades would you have going at one time? How much time do you typically (I realize there probably isn’t anything remotely typical) to cycle into a position on the short side/long side. What is a prudent amount to hold in reserve? What are common pitfalls/how do people get burned?
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The number of open positions that I, as a full-time trader, and someone that only trades or invests part-time will & should differ. It is not uncommon for me to have 20, 30 or even more positions at any given time but that would probably be too much for the part-time trader or even a full-time novice trader to manage. I think that anywhere from 8-15 positions is both a manageable number & most importantly, enough to provide diversification among various asset classes & sectors.
As far as the time to cycle into a position, very often I take a full position at once, for example, if going long on a breakout above a well-defined resistance level or chart pattern. If I’m a little less sure on the entry, I might scale in by taking a partial position at one objective level (say, the breakout above a falling wedge) & then adding to the position at the next objective entry (maybe a breakout above horizontal resistance just above the wedge).
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I have multiple accounts (4 IRA accounts and a 401K plus a 2 taxable accounts) mostly with ******* but now I have an **** account as well. It’s a decent-sized chunk of change – able to tolerate multiple positions at any one time – but it’s not so large that I could walk away from the day job yet. I’d say that I can often trade daily but there are some days where it’s impossible to trade during market hours. I’ve set my risk level at $****, which in some cases results in position sizes as high as $***, which is not usually a problem for me. But for the time being, I don’t want to tolerate a ton of risk on any given trade.
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I’m not sure if that was a question but I would say that at anytime, for whatever reason, you do not feel comfortable with taking on risk or being in the market…STAY OUT! Other that letting your losses run, I can think of no quicker way to losing money that over-trading. Resist the urge to always be in the market. Wait for the market and your trade candidates to come to you, making sure that your outlook for the market or a particular sector aligns with your trade(s). The market is not an ATM that you can continually extract money from day in & day out. I find that my profits & losses come in waves with periods of stagnant (or no) returns that can last for weeks or even months at time.
I’ve used the analogy before that I view trading like an ambush predator. We’ve all seen those documentaries of lions hunting in the open grass lands. The sit & wait patiently for the right gazelle or whatever to get close enough before they decide to creep up close enough to then burst out of the grass & attack. If the lions ran after every gazelle that came into view, they would deplete all of their energy (our capital/funds) and eventually grow weak & perish.
Trading is the same way. You must be patient & wait for the market & your trades to set up where you think that you have a very good chance of success.
Hope this helps & please let me know if I missed anything.
-Randy