Playing Defense in a Tough Market

At times, markets have nice price trends where being long or short for days or weeks will lead to profitability. These are the markets that most new traders make money in by having a bias and holding onto that belief. This usually doesn’t end well because they are unable to understand when the trend is changing. Other markets trade within ranges. These traders buy support and sell resistance over and over. These are the markets that will make them the most money.

Then there are times of high volatility and no trend, no support, and chaotic price action. These fake breakouts and momentum that unexpectedly fades and reverses will quickly take profits. It’s time to step back, trade smaller, trade less, and wait for a pattern to emerge from the chaos when the market rewards taking quick profits and punishes your signals. It’s best for most traders to do nothing during corrections and downtrends and wait for an uptrend or bull market to come back.

In the current market defense is more important than offense. Keeping your capital safe is more important than trying to grow it.

This is the time to focus on:

  1. When prices are below the 200-day moving average.
  2. Your total risk exposure.
  3. The VIX levels.
  4. The Average True Range.
  5. Your position sizing.