Trading Techniques: The Case for Doing Nothing

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We live in frenetic times. It sometimes seems that as our ability to solve problems, cure diseases and react to news increases, so does the pressure to always have an answer, to always do something. It is easy to fall into the trap of believing that what we do is not really relevant; doing something is what counts.

These philosophical musings came as a result of sitting staring at a blank page this morning. In many ways, producing a daily column about markets is not that hard; there is always something going on somewhere. This morning, though, I nearly fell into the trap described above. The stock market is in a period of consolidation and the temptation was strong to attempt to predict the next move. The only problem is that I don’t have a particularly strong conviction as to which way it will be.

We have come a long way this year, and as tapering time approaches, the case for a correction is fairly obvious. The recovery is slow and the data is mixed. On the other hand, the Fed is still pumping liquidity into the financial sector and, as I often say, that money has to go somewhere. While US stocks are no longer cheap, they could still represent the best option for cash seeking a home. Over the last few days, these conflicting forces have balanced each other out and the market has stalled. A rational analysis would suggest that continued sideways movement can be expected in the short term.

 

What traders (and to a certain extent investors) need to understand is that, sometimes, no trade is the best trade. As a good friend of mine in the London Forex market used to say, “Square is the third position.” You don’t have to be short or long. One of the hardest things for traders to do is to sit on their hands, but the successful ones learn when to do just that. We pundits, too, live and die by having strong convictions, but my time in trading rooms has engrained in me that taking a position for the sake of it is a dangerous habit.

Having a position without conviction is a recipe for disaster. If you were to buy, say, SPY or a couple of large caps such as XOM and MSFT without a real belief that the market was set to rise, the problems start when the market goes against you. At the first sign of a drop, you inevitably tell yourself “I knew this was going down” and reverse your position. When it begins to bounce back, you think “See, I was right all along” and reinstate your original long positions. I have seen people lose fortunes in this way, even as the market they were trading stayed in fairly tight ranges. It is amazing how much damage can be done within a 20 point range if you hit tops and bottoms.

You have to overcome the temptation to trade just for the sake of doing something. Whether you are a day trader or a longer term investor, over trading can still be a problem, but it is less to do with the number of trades you do than with your motivation for doing them. Boredom, or that nagging feeling that you should do something, is second only to “I have to make this money back” in the list of terrible reasons to trade.

Writing an article that includes a confession that I have no idea what the next market move will be is probably not a great idea, even if it is honest. If my training were that of a journalist, I would probably avoid it, but it isn’t. I was trained to trade and therefore understand that admitting that you have no view is very often a positive.

It is hard in the “do something” world in which we live, but, if you are to make money from whatever market you trade or invest in you must accept that sometimes inaction is a positive thing.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: MSFT , SPY , XOM

Martin Tillier


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