Financial Widgets | A Lesson To Learn When Your Rules Panic

: Image by artemuestra via Flickr

Usually, when the stock market goes up or goes down and it’s confirming a trend it does so on larger and larger volume until finally volume blossoms or spikes. This observation is what caused many, many traders to not trust the last year and a half’s stock run-up. It really wasn’t a run-up.

Down is Growing Up

Volume never acted correctly, falling even as the market climbed. This is where the phrase “melt-up” came about. I watch a 50 period average volume indicator on a daily chart and I’m still seeing the same thing happening. There are many technical reasons for this, the least of which is the fact that volume is now controlled by High-Frequency-Traders (HFT’s) and computer’s rather than the typical retail trader.

These manipulations are something that we just need to learn to deal with. It didn’t help that my trading rules stopped me out of some of my positions way too early. However, when the market was moving up last week I was suspect. So I let my rules stop me out. After all, rules are there for a reason. The Trading To A Million (TTAM) portfolio took a beating.

Managing Risks vs Panic

Yesterday, saw a great healing take place in that I am now up after some timely quick trades. Did I do the trading over the last week correctly? I’d have to answer no. Did I make money? I’d have to answer yes. Would I do it again by choice? My answer should be no. Will I do it again? My answer is probably yes based on my history of not always perfect trades. Remember that you don’t have to be perfect to make money in the market, just good at managing risks. This gets easier when you have more money but the risks never goes away.

This type of question and answer leads me back to indicators. Volume to begin with. Volume was higher yesterday. It wasn’t above the 50-day average but it was higher than any day since June 9th; the last day the Q’s were under the 200-day simple moving average. It indicates a confirmation of the downward pressure that still exists.

What’s Up Is Cutting Down

Another observation is the 50-day moving average with respect to the 200-day. These are 2 moving indicators that traders religiously follow for good reasons; things I won’t go into now. Just for your own observations look at a daily chart and plot the 50 and 200-day moving averages against the Q’s or the Spyders (SPY). The market seems to be having a hard time getting above it’s 50-day and staying below it’s 200-day moving average. It current status is the range of which we can frame our trading on. Following (knowing) this range will certainly show us ho to cut down on the risks that we take. Hopefully, it will cut down on the daily anxiety we feel too. That always improves our profit line.

Patrick