<<< DEALING WITH CHOPPY MARKETS >>>
In an favorable market environment, you’ll find very few stocks that fit our criteria for perfect set up. You almost have to force trades in order to be active. Most setups of very sloppy and corrective environments. This is the side affect of the upward tick in volatility. The necessary tightness in price for consolidative breakout patterns is almost non-existent.
Just because the indexes are under pressure during choppy markets, it does not mean that there won’t be long setups that will work. There will be some breakouts that will work, but if you take 20 of them, a dozen or so are likely to fail in the rest will deliver subpar results. The same type of setup that has a 75% success rate in returns of 3XRisk in a healthy market could provide a 35% success rate and return one 1XRisk in a choppy market.
We are not in the business of scalping for 1 to 2% while risking a similar amount. We want to get paid handsomely when we risk our money and dedicate our time. This is why knowing when to be active in when to lay low is of utmost importance.
So how do we deal with unfavorable market conditions?
We cut our risk per trade and we trade a lot less. If you risk an average of 1% of capital and make 20 trades a week, you cut your risk to 0.25% per trade in decrease your number of trades to 5-6 per week I maybe even to zero when the floors of support have given way. The trend is our friend until it is not.
You don’t limit drawdowns by only decreasing the risk of your traits, if you decrease your risk to 0.25% per buy signal, but you keep actively trading, you could still have a sizable draw down. The draw down is not the worst thing that could happen to you in a choppy market. Losing your confidence is far more dangerous and far more significant.
Choppy turbulent market environment, it is of paramount importance to keep the keel in the water.
Being too active in a choppy market environment could condition you to adopt all lot of on healthy trading habits. If you get too many hits–and, possibly, even go to cash?
You are not only protecting your capital, but also your emotional well-being and confidence. In a sloppy, choppy turbulent market with a horizon difficult to discern, it is of paramount importance to keep that keel in the water.
Being too active in a choppy market environment could condition you to adopt a lot of unhealthy trading habits. You get too many hits—losing trades—even if they are small ones, you will start to subconsciously doubt your market approach and methodology. You will start to take quick tiny gains because it would be afraid that the market will take them back.
If you are too active during choppy markets, you are going to lose your confidence because of the many losses you may incur. When this happens, you are not going to be aggressive when it matters and weighing you really have to perform in order to make a difference.
Once a more healthy market environment presents itself —it always does—you won’t be in emotional state to take full advantage of it. The majority of your gains are supposed to come in this favorable market environment. You won’t be able to be active exactly when you have to pounce.
exerpt from a work in progress, Kairos Ops’ Guide to Momentum Trading