Only trade when the odds are favorable

The last few weeks have been a bit frustrating from a trading standpoint. The market has continued to march steadily higher despite being overbought and having to deal with breadth and seasonality issues. The most frustrating thing for intermediate-term growth traders has been the lack of good setups on the long side in rapidly growing companies breaking out of solid basing formations. While there have been breakouts, they’ve lacked the buying enthusiasm you find in a more favorable environment. The choppiness has made it difficult to stick with many of these trades. Therefore, underinvested is where I have found myself along with many other intermediate-term growth traders.

What traders need to remember is that they are managing money on an absolute basis -- not a relative basis. Therefore, there will be times when the market as measured by the major averages performs well, but your particular strategies struggle. Just as there will be times that your strategies will perform wonderfully while the market stinks. If your strategies aren’t working well, that’s really all you need to know about the market. One of the worst mistakes a trader can make is to trade too aggressively when the market is moving higher but your strategies are underperforming. In the case of intermediate-term growth traders, they will frequently find that the lack of solid setups and the poor action is a sign of market weakness.

Becoming more aggressive as the market weakens means you will not only underperform on the way up, but you will likely lose money faster than the market on the way down. Patience is key. Nobody outperforms the market over every time period. If you trade only when the odds are favorable and the wind is at your back, you should perform very well over the long run.

Best of luck with your trading,
Rob
Rob@HannaCapital.com

For those who may be looking to expand their knowledge beyond just market timing, my Hanna ETF Money Flow System utilizes the VIX in generating trading signals for spread trades.

Rob Hanna is the principal of a money management firm located in Massachusetts. He has spent the last several years developing and refining methods for trading in stocks across multiple time frames. He selects stocks using both fundamental and technical criteria, and then trades them using technical analysis techniques.