Knowing when to stop trading proves as important as setting up a system for trading. This last week provided traders with a prime example.
Annotated 7-Minute chart of the SPX:
The immediate post-FOMC reaction was a series of wide swings that eventually tamped down into a chartable formation, a triangle. That settling into a formation more than a day in the making allowed wise traders to watch for an opportunity to play a breakout. That breakout was to come to the downside on the SPX about 10:30 Thursday morning when the SPX broke through the trendline then at about 1278. As of this writing Friday morning, the SPX had reached a low of 1261.02. The patient trader was well rewarded for that patience. The trader who must trade every day may have participated in the bearish gains, too, if that trader guessed correctly, endured the pre-FOMC ennui without bailing and wasn't stopped on the post-FOMC swings. Some would rather miss that boredom-to-terror trajectory.
Although its pattern was different, the more volatile SOX also saw price patterns pre- and immediately post-FOMC that would have whipsawed many traders.
Annotated 7-Minute Chart of the SOX:
Such activity can also be seen surrounding announcements that participants widely expect to move the markets. An economic number that might impact a rate-hike decision, a market general's earning's report or an OPEC decision at a sensitive time number among those kinds of events.
While the January option expiration Thursday proved different, many traders note a tendency for equity and equity index prices to be pinned at certain levels beginning about mid-morning Thursday during option expiration week.
Annotated 15-Minute Chart of the SPX:
Again, the patient and experienced trader might have expected an untradable pattern near option expiration and have waited for a more tradable pattern to set up. Since that rather neutral triangle--it's perhaps slightly more bullish than neutral--formed after a climb, the anticipated break might have been to the upside, so anyone guessing about next direction late in opex week might have guessed wrong.
Light-volume holiday weeks also present their own challenges, but they tend to come in two varieties: prices that chop around or big price movements that come out of nowhere, with big moves made possible by the light volume. Examples of both occurred near last Labor Day.
Annotated 15-Minute Chart of the SPX:
These provide a few examples of instances when it's better to step away from the computer and not click that mouse. Others include times when known price patterns do not predict eventual movements. Over the previous month, many technical traders complained about a persistent underpinning of the markets that renders technical analysis less useful than at other times. Until recently, breakdowns did not see follow-through to the downside. Chart patterns signaled breakdowns that never came. When a strong trend persists but warning signs begin to appear, trading in the direction of the trend may be the only trade that's workable, but even the active trader should consider lessening position size in such a market.
All examples listed here reference external events. Other articles have dealt with other issues related to a trader's experience, such as not trading during times when work or family stresses do not allow clear focus or attention to trades, when frequent losses drive the need to make up the losses, or even when frequent gains have created an I'm-a-genius attitude. Those cautions should not be ignored, either.
Traders should love what they do. They should want to trade, or they're in the
However, experienced traders know that times exist when it's
best to step back and not trade. This article addressed a few of those times.
Occasionally a price movement that might have been wildly profitable will occur
after a patient trader has determined not to trade on one of those days. Oh,
well. Other trading opportunities will arise. Learn when to step away.