Market Uncertainty

The chart above was originally posted by Woodshedder

Without proper market direction we find ourselves in the land of high volatility. With volatility the opportunity presents itself for sizable gains as well as disappointing and frustrating losses. One minute your indicators signal a prominent buy and the next minute the market moves in a totally unanticipated direction and you find yourself under water.

I have had several trades go unexpectedly against me as of late. Granted, I do trade highly speculative equities but this month’s losses were enough of a catalyst to make me refocus. I liquidated all of my positions with the exception of Microvision Inc. (MVIS), my only long term holding. As of March 20, 2007 I am now in the hole $1600. Although not a terribly large loss for the year I view it as enough of a warning to reassess my strategies and execution methodology.

Today also marks interesting territory as the NASDAQ is currently sitting at 2400; once support, now clearly a level of resistance. Tomorrow will print an important test. Can we break through this barrier on significant volume or do we falter and continue downwards into a more pronounced bear market? I believe the answer will weigh heavily on the Federal Reserve announcement tomorrow. Until the market can get some definitive direction I for one am going to adjust my trading strategies so as not to continue bleeding my account.

1) Limit absolute number of trades - I believe part of my problem early this year was partly attributed to over trading. Not only is this an easy way to rack up costly commission charges, but excessive trading can lead to sporadic and inappropriate buying and selling. Consistent profits are built not by multiple trades, but by only acting on those trades with the highest probability for success. Over trading can lead our minds to believe we are seeing a perfect setup, but we are merely witnessing mediocre setup after mediocre setup. More often than not, our most successful trades will be those that jump out and grab our attention.

2) Take the money and run - In the words of The Steve Miller Band, "Go on take the money and run." These simple lyrics fit perfectly with buying and selling equities. After a sizable 20% run up, why am I still sitting around waiting for further gains? Markets without clear direction do not reward though that camp around on a position expecting additional run ups. After all, no one goes broke by selling too early.

3) Buy at support and sell at resistance - Arguably one of the most over stated pearls of market wisdom, but how many of us actually do this consistently? We are ever so eager to buy those high flying stocks, but why do we run in fear when our favorite companies are being shunned by the market? A recent example of this is IMAX. After totally being obliterated by the market late last year the stock was sitting at multiple year lows. Did I act and buy those calls like I considered doing? Of course not I was fearful that more bad news was on the horizon.

4) Find your winner and wait - Even in sub optimal market conditions there will be those stocks that out perform. The problem is trying to find that match. Living in Seattle I was exposed to Microvision Inc. late last year. This totally reformed company is a god send with a product pipeline potentially worth billions in revenue. Regardless of market sentiment I will be buying this stock on any dips.