BAD NEWS: There is absolutely no sympathy in the stock market. If you need sympathy look elsewhere.
GOOD NEWS: If you have trading rules AND FOLLOW THEM you will not need what the market will not give.
Let’s look at a good example of what I mean. The following is a recent chart of Intercontinental Exchange (NYSE:ICE).
Notice that in just the last 6 trading days ICE lost all of the gain from the last 49 trading days (note: the sell-off in this stock started BEFORE the negative news yesterday!). For trend traders following the 21 TANKS as a good trend line support money was made for several months. However, warning signs began to appear for the following reasons:
1) The 21 TANKS acted as a strong defensive support until June 22.
2) A downtrend line formed on the candlesticks AND on the CROSSHAIRS indicators as ICE broke the 21 TANKS a second time.
Just these two simple warning signs gave a highly probable indication that ICE was heading lower or, at best, beginning to consolidate. Either way, entering a long trade here on the likelihood that the 21 TANKS had regained support is a low probability trade. Going short would have been a higher probability but hindsight is always 20/20 and anyone can make wise decisions after the fact. My deployment chart did not give me a signal on this one to trade short so I was not in on this down side move. So what!
My point here is this: the market usually gives slowly and takes quickly. In this case ICE took back in 6 days what it had given in 49!
1. The market is a place where anything can happen AND HAPPEN QUICKLY! Be ready to enter if your rules are met but, most importantly, be ready to exit if your loss point is broken! If you do not respect the market, all the money you made over a long period of time will be taken over a short period of time. The market has no sympathy for your disrespect.
2. Even the most tried and true Wall Street technical averages will not work 100% of the time, mine included. In the case of ICE, the very strong support usually associated with the 50 SMA (“TANKS”) is broken as if those tanks were not there at all. So, traders who were still long this stock since it found support on June 23 (the previous “break-out” level) were most likely looking for ICE to find support again at the 50 SMA. It did not happen. In fact , there was a bullish report to buy the stock the day before the huge drop! If you were long here it was time to get out!
3. As a trader you should do exactly what the market does: give slowly but take quickly. What do I mean? By having a plan with a set of rules you enter the battlefield when you want to and you do so on your time. Better yet, let’s call it patient or slow time. Once you enter the battlefield you exit quickly according to your profit target and your loss target. Whatever those targets are do it decisively and quickly. In other words, do not think about doing it, just do it.
4. Do not get angry about what appears to be an irrational market. What is irrational is the trader who tries to make the market conform to his “rational” beliefs. Sure, it does not seem rational for a stock to lose 49 days of gains in 6 days (news or not) but that is just the way it is. Unless you have a few billion to trade with you will not move the market. Accept your limits and move on.
5. You never know when or how news is going to affect a stock’s price, so do not stick around to find out. How to trade the news is really a post for another day (and one I am working on), but the bottom line is you just do not know how the majority of traders are going to react. In this case, they sold and sold hard on news that Commodity Futures Trading Commission Chairman Gary Gensler may seek to impose limits on trading and positions in energy commodities (the heart of ICEs business). If you are in a trade and news hits either take the profit or loss (whatever the case may be), chalk it up as a risk factor for trading, and wait for your next set up.
“Happiness is a function of accepting what is.” Werner Erhard