For the last few days, trading the ES (and other products) has been mildly lame. The promise of markets becoming busy again post Fed day last week (9/13/12) has been cruelly unfulfilled as of yet and the ES has done little other than balance around the top of the move from that FOMC day (excluding the Friday straight afterwards).
Here’s a chart so you know what I’m referring to:
As you can see, we’ve had two thrusts in recent weeks, followed by sideways consolidation action. Given that the end of the summer trade should have come and gone by now, you’d be forgiven for anticipating slightly more action following such important new information. Although the behavior is by no means unpredictable, such is the trickery of the markets that it’s possible to get sucked into this kind of thinking.
In offices and on the net in the days following big moves like these, you’ll often hear or see traders getting really interested in the markets. Indeed, they’re often over excited by the whole thing. While in reality the ES is slowing down, some are trying to get into trades here, there and everywhere. I look at this and then look at the market and see the kind of sacrifices in price traders are all of a sudden willing to make. Even in the face of a quiet market, because of the previous move up they want to hammer the market every time it wiggles, excited at the prospect of another large move. Inevitably some of these guys over the last few days will have been chewed up in what has just been consolidation. But the fear of missing out has driven them to abandon their plan and take poorly considered trades. It may well do the same thing again in the future if it’s not properly addressed.
If you look at the month of August, it’s not especially hard to see why anticipation has built up. Slow days with relatively small ranges and diminishing volume were the norm. Not exactly the most exciting of times for the day trader. So a bit of movement is clearly likely to get at least some people fired up. So who are these fired up, excited traders with a fear of missing out anyway? They’re usually the yet-to-be-successful but determined to stay glued to their screens in order to further their education, experience and most importantly, increase their account balance type. These guys (and I say “these guys”, but I think it’s more like a sliding scale – we’re all guilty of these sorts of mistakes at times) are so focused on the importance of the next trade that they forget that the markets are a continuum of opportunities. You can never capitalize on all the setups which present themselves but with absolute certainty, if you miss one then the next is just around the corner. This is what counts in trading. Don’t get too involved in any single trade. It works or it doesn’t, you execute well or you execute poorly. Next. Move on.
In placing too much importance on the next trade, the fear of missing out leads to poorly controlled impulsive trading and I’m sure I don’t need to expand on why impulsive trading is a bad thing. But to make things worse, the folks that fall victim to getting sucked into this type of thinking are the same folks who don’t really take time to make a proper plan and prepare each day. If you take account of context and consider multiple possibilities for the way the market might trade, you’re much better prepared to identify it correctly as it unfolds.
What it really boils down to is learning to take your trading cues from what the market is actually telling you. If you can keep your focus on your charts instead of what you believe should happen, things are much more likely to work out well. Don’t predict. Analyze, theorize, respond, reset.