Can this uptrend last?
Now, we are all kind of shocked about the depth and the length of the uptrend in the markets. Can it last?
What does it mean for my risk management?
Well, the news yesterday about the carmakers not getting more tax payers money if they can not prove that they are able to survive put a stop to a lengthy trend in the market that knew only one direction…up,up,up, well above 20% in the last three weeks alone.
The market fell and gave back a lot of the profits of the last few weeks yesterday. One would think that after an event like this it is doomed to further go down the next day.
It did not do that though, instead it went up, like nothing had happened yesterday. What now?
Well, my positions are controled by risk management, so most of the long positions were stopped out yesterday, when the market tanked. They still produced sizeable profit but they were stopped out. I also went short on a few positions and they were in the green during yesterdays market action.
The problem is, that they got stopped out today when the market opened up and then went straight up. So i lost my long positions yesterday and i lost my short positions today. But i still control the action in my portfolio using risk management routines, so i got back into the market long today.
Do i care whether the market goes up or down in the upcoming days? No i do not, i just make sure, that i follow a couple of important steps in risk management:
- I make sure that all my trades follow the given entry rules, so i do not enter a trade because i like to or because i see something in the news. I will only open up a trade when my trading systems say so.
- All open trades need a stop and i need to know this stop in advance. I figure out the correct stop by using the volatility of the stock i am trading.
- All different volatilities in the account need to match, so i can not have 3 high volatile stocks while being solidly in the red. When i start trading a new account or start trading a new week with zero profits i need to make sure that i use low volatility to be able to come up with a few winners. I can always size up on volatility later but not from the getgo.
- I also figure out how much money i want to make. For me it doesn´t make sense to “make as much as the markets could possibly give me”. This approach usually ends up losing. What i need to do is set realistic goals that match my lifestyle. If i came out of a job making $400 a week i can not expect to make $2000 a week in my first trading week, reason being, my mindset is not up to it, i will probably take winners off the table to early and let losers run to long.
- I don´t predict the next market move, instead i let the market move and then decide what i do with that move.
- I let my positions interact with each other, so i tend to build up on them when i am ahead and i go back on them when i lose.
So, once again do i care whether the uptrend in the market can last? No i don´t eventually the market will show me what it does, all i need to make sure is that i am participating in the market (remember you can only make a profit, if you actually have open positions) and that all my open positions are safe by knowing when to get out of them.