Trading the Markets That Have No Memory

I am not one to 'troll' stock or stock trading boards/chat rooms and the primary reason for this is that the chatter is mostly opinions, and usually egregious ones. It is common for the participants to either cheer their stocks up or give some reason as to why they are in losing positions, or how they are about to turn in their favor (those are the more comical ones).

However, I do follow one particular chat room and participate in another, StockTwits.com. Personally, I don't suggest being in these types of chat rooms during the day because even the most experienced traders, and I will throw myself in there, can somehow be swayed by useless rhetoric, which really is just a waste of time. I don't need 'shortsllr24' to entice me into taking a stand on oil at $42 a barrel if I am even thinking that way at all.

It is worth noting that 'smart' guys are even learning that the market has no memory from day to day and that is a common frustrating theme. One can blame the 'algos' or the HFTs for inconsistent moves but the big money usually wins out. The reason being that now more than ever, 24/7 trading in volatile FX markets and some international indexes making huge moves that affect the open of US S&P Futures throws many plans out the window – side note: HAVE A PLAN.

Many traders I know have recently gotten into more 'trouble' than usual which is why the more experienced group blames the market on having no memory from one day to another. What I see happening rather, and I catch myself time to time, is the biggest trading mistake out there.

The worst mistake is that winners are being sold on a profit basis ($) and the losers being held are based upon the price of the stock or index. I ask our traders when they exit positions why they sell the winner and I get 1000 different reasons and when I ask why they hold the losers, I hear that it was because the timing was off all the time. One question I always ask is this….if you wouldn’t start the position you are down in, why would you buy more?

I see all the time the winners get sold and traders forget where they even sold them, traders focus on EVERY tick when that position is against them. I did an exercise with our traders where they added to winners (ones with good volume/range/price action…a prerequisite) and added the same share size to the losers. Time and time again, the winners usually work or hold form and the losers don’t come back. When I got this down I went from a trader who knows how to trade to a trader that knows how to trade and make money. The averaging down as noted above is a close second in discipline rules.

I may miss some of the bigger moves in VRX or TSLA but this kind of market, a choppy, albeit trending one, is when this trading style works. I recommend playing relative strength with stocks that have great volume/good price action and range. Most recently we play: CHK OAS WLL SM NUGT GDX LABU, keeping in mind that the USD and USO (the $ and crude) are the instruments that we watch to play the rotation in the overall indices.