Friday 8 February 2008

My 3 rules for trading slow markets

Andy Swan created and co-founded DaytradeTeam five years ago on a principle of empowering individual stock and options traders with the techniques and analysis methods typically reserved for elite professionals. His expertise in technical analysis and commitment to educating members earned DaytradeTeam a top-ranking among advisory services for several years.

Day trading is a mental game where knowing your environment (market conditions) is one of the primary keys to consistent profits and success. Just as knowing when NOT to trade is extremely important, it's also crucial that you know when you are in a slow market and how to react accordingly.

Most experienced traders instinctively know when it's a slow market, but here are a few indicators that you're in a slow market:

Low Volume -- Take a look at the volume figures for the overall market--how do they compare to this same point in time on previous days? If volume is low, the market will be slow.

Very Little News -- When the talking heads have nothing to talk about, then you can be sure that traders have nothing to trade. Read the headlines--if you notice that the most prominent stories are very boring, then you've got a clue to how the day will play out.

Small Moves FEEL Big -- Nothing is worse for the psychology of a trader than to start thinking that a nickel move on QQQQ is big. That's exactly what happens in slow moving markets. This mentality will absolutely kill you when things speed up, so don't fall into the trap of looking at relative movements for the day.

The key to day trading in a slow market is to take it....well.....slow! Be very patient and let the trade setups come to you. Here are three easy little rules that I use to expand my profits in slow markets:

1. Don't Sell Short! Dull, slow markets will move to the upside more often than to the downside when they speed up, and short sellers get creamed. Just stick with buying opportunities on slow days--you'll have far better returns.

2. Limit Your Open Positions. In slow markets, I like to limit myself to just one or two open positions at a time. Anything more than that is asking for trouble and could really be painful if the market speeds up in the wrong direction on you. Plus, it's a good way to limit the commissions you pay on the day. Remember, commissions become a larger factor in your profitability when positions move smaller amounts!

3. Be Stingy! Use limit orders to buy just above support levels and set very tight stops. Your targets should be brought down a notch or two as well. Remember, you're setting yourself into positions that will do well as the market gains traction, so don't let your trades get away from you early.
Look, slow markets are boring, but they don't have to be painful. Just look at them as a mini-vacation where you can step away from the computer every once in a while for some fresh air. Avoid over-trading and you'll be on your way to slow-market success!

Andy Swan