A Trader’s Job Is To Protect Self-Confidence

by Olivier on November 17, 2011

Protecting one’s self-confidence is key to long-term market survival. If I had to sum up what’s going on in the markets in one sentence it probably would be the following:

This is an extremely dangerous market, hence it is best to stay out.

The current market environment is one of the most dangerous, treacherous and choppy I have encountered in roughly 15 years of trading. I recently went back to 100% cash and will stay in cash for the time being. My job as a trader is to protect both mental and financial capital in order to be able to get exposure once sustainable trends emerge. We continue to see a world class chop-fest. Only the very best and most nimble traders are able to strive in this environment. The great majority is churning their accounts and slowly bleeding to death.

In my opinion the best traders are not those who try to trade every single day of the year. The best ones are those who can identify the ideal trading environment that fits their technical abilities and trading personality. Put another way: If you put on several trades in a row that do not work because you constantly get stopped out it is time to ‘get smaller and smaller and smaller’ as Dennis Gartman once said. Personally, I go even further than that. When my own equity curve is going nowhere for a while I force myself to take a break for at least one or two weeks. That’s when I relax, rebuild mental capital, rebuild self-confidence and reassess the overall market trend and market environment. It basically comes down to staying in control.

Here’s a few things I am watching that tell me to be and stay extremely cautious:

  • XLF – Financials ETF: The financials can’t seem to move up. As I’ve stated in the past, a sustainable and sound up-trend without the participation of the financials is very unlikely at this point.
  • FBT – Biotech ETF: This is one way for me to gauge market participants’ appetite for ‘risk-on trades’. The biotechs are not leading. Actually, FBT is threatening to make a lower low.
  • IFN – India ETF: The India ETF is moving lower again. I think India has huge potential. India moving lower is a sign for me to stay very cautious. Put another way: If the one country with potentially the best outlook for decades to come is not moving up, we’re in trouble.
  • GDX / GDXJ – Gold Miner ETFs: The recent up-move is not convincing enough. The huge gap is still acting as resistance. GDXJ is still underperforming GDX. Former highflyers are in deep trouble. Yukon gold stocks and Tanzania related gold stocks come to mind. KAM.V – Kaminak Gold and ATC.V – Atac Resources are getting killed. CAN.V – Canaco Resources and TRX – Tanzanian Royalty Exploration have literally been destroyed. Technically speaking they are in confirmed downtrends. They had their day in the sun, new leaders will emerge. Simple as that. Remember: The best performers are almost always ‘new stories’ and stocks with no ‘overhead resistance’. The following quote cannot be repeated often enough:

The crowd is bargain hunting in what was; the knowing are buying what will be. – Justin Mamis

Conclusion: The market continues to chop most traders to pieces. Whenever that happens I don’t try to be a hero. Instead, I step aside and watch. That’s how I protect myself and how I make sure to be ready and rested with plenty of ammunition once conditions are conducive to position trading during strong trends.

The best quote I can come up with to summarize the current situation is from Sun Tzu. Feel free to review Sun Tzu’s Principles. A very quick and refreshing read.

He who knows when he can fight and when he cannot, will be victorious. - Sun Tzu

Charts: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2791469

Buenas noches!

Related posts:

  1. Horrible Market Conditions For Position Traders
  2. Great Traders Offer No Excuses
  3. Constructive Inner Dialogue For Traders

{ 1 trackback }

Comments on this entry are closed.

Previous post:

Next post: