Uncertain Market Conditions and Our Most Important Job

Undedited version of article I wrote for SFO magazine.

Making money in the markets is difficult, especially in the extra volatile environment we have had over the last several months.  I like to trade with the prevailing trend, but look at the mess of a chart below which represents the daily action of the S&P 500 for the last 4 months.  I think the official name of the technical pattern for this time period is “it’s a fucking mess.”

It really annoys me when people try to make it seem like consistent market profits are easy.  Watch your wallet when those people start talking loudly.  Here is a fact, during turbulent market conditions the average market participant loses their confidence (shortly after recognizing losses) and they begin to search for answers.  They want certainty.  Blog traffic always spikes on down days, people are looking for reasons and solutions.

Unfortunately there are many unscrupulous characters who will try to take advantage of what truthful people recognize as uncertainty.  These people sell the unobtainable hope of nothing but winning trades.  It is complete bullshit, it simply does not exist.  There are definitely times when trading profits come easier, but consistently slaying the market in every environment is something only to be written about in fairy tales.

Three weeks ago I wrote about a potential trade setup in shares of Las Vegas Sands (LVS).  The idea was to buy the stock on a push past resistance found at 49.oo for a potential move up towards 55.  The stock made it past 49 and looked promising for a couple of days but on the third day it opened for trading at 46.48 which was a dollar lower than the recommended stop.  This is the shitty part of trading that few people talk about, so let’s discuss it here.

What is the best way to handle this type of situation?  Personally, I feel it is best to “rip the band-aid” and take all the little hairs with it in one quick action.  When the reason for owning a stock no longer exists, why would we continue to hold it?  If I want to own a stock which is in an uptrend and when that uptrend is broken the market is telling me that I was wrong.  Being wrong is part of trading stocks, it’s the part none of us likes but it is a certainty.

If we sold LVS on the open at 46.49, it would have resulted in a loss of 2.52/share or about 5%, that stings!  But if we had not honored our stop and instead held on and hoped it would come back, the results could have been much worse.  Just eight trading days later, LVS traded as low as 36.20, selling there would have grown that loss to 26%!  It is said that it is okay to be wrong, but a sin to stay wrong.

Stocks are volatile and even more so this year. I believe that how a losing trade is handled is one of the most important factors in consistent market success.  We remain in a volatile market and despite confident projections you may hear, there is not a single person who knows with any certainty what the course of the market is for any period of time.  Our most important job is to manage risk and that means honoring stops, trading reasonable size relative to your account and also objective recognition of the market environment.  This market environment continues to shout uncertainty, your approach should reflect that message.