A year of firsts. Lessons to be learnt.

If we fail to learn from the past we are condemned to relive it. Nothing is more truthful than this saying applied to trading. This is why many traders, correctly so, look to previous patterns of price action to guide their actions in the future.

However, the market is constantly changing and evolving. One year may not be the same as any other. This year has proven to be different from every other year there has been in the market. As traders we must evolve our trading to the changing market within which we operate.

In 2011 there was unprecedented volatility in the financial markets. In 2011 we saw

  • The first year where the XJO (the asx S&P200) closed down 2 years in a row.
  • The first day ever when XJO moved a total of 11% within a single day on XJO (Aug 9)
  • The largest ever single day volume spike in the history of XMJ ( the Australian materials sector)
  • The largest every 4 day volume on the history of the DJI Aug 9-11
  • The first year ever with 100 days greater than 100 point moves on the SPY.
  • The first time in 41 years where the spy closed within 0.5% of its opening, (this occurred in spite of the fact that the DJI moved over 120% of it’s value in 11 major moves)
  • The first period ever where 80% of all volume on an exchange was algorithmic(this occurred through august on the DJI)

The market this year was characterized by massive moves sparked by news announcements, natural and man-made disasters and ongoing concerns about debt in Europe and elsewhere.

So what is the significance of this information and how do we use this to our advantage?

Firstly, we should never expect the past to be similar to the future. The speed and range of market movements is increasing and we should expect more of this in future markets. As the penetration of the algorithmic traders increases and the exchanges become more dependent on the income derived from those traders, the price movements will become more consistently larger.

Secondly, traditional methods of trading are becoming more and more unprofitable. In such volatile markets last year’s where rapid movements of entire indices occur, tradition trading methods would have stops being hit all the time. Trend traders would be unable to make money because of the rapid swings and periodic clean outs of stops. Patterns would have difficulty making money as many patterns fail immediately after break out. The support and resistance line traders would have been worked over similarly as the volatility of the market pushes price briefly above and below support and resistance levels only to reverse once trades are entered into.

Finally, the methods of trading that support shorter term profit targets that take advantage of the volatility will be the trading style that will be rewarded. Many retail traders like to hold positions for longer time periods. This is referred to buy and hold typically long trades. That strategy will have proven to be very costly in the past 18 months.

As traders we must adapt to the new market and to use what the market throws at us to our advantage.

 

An expertise acquisition perspective.

The acquisition of expertise involves a systematic practice of the performance skill in many different conditions, so that when the performance is required in a new context it can be accomplished with skill.

One aspect of training that is central to expert performance is the acquisition of flexibility to perform in different contexts. The performance skill is practiced in as many different possible environments to build flexibility into the performers performance.

As traders, we need to have trading plans that are flexible that are able deal with different market conditions.

By building flexibility into your trading you are able to function in profit in a market that is volatile.

 

If you have flexibility as part of your trading strategy,

 you will never be in a market that you can’t profit from.

So, how do you do that?

Firstly, you need to have trade setups for volatile and non-volatile markets.

Secondly, you need to have contingencies for each trade if the volatility of the market suddenly increases

Finally, you need to know what sort of markets you don’t want to be in. If this isn’t it you should be out.

2012 is likely to be as volatile as 2011. The causal factors of the volatility have not gone away and are likely to accelerate to their conclusion. If you are prepared you can trade profitably in any market.