Common Sense Isn't So Common

11/04/2013 6:00 am EST

Focus: TRADING

Traders need to be prepared to trade current market conditions not what they think it ought to be, otherwise they risk blowing out their account, writes Erich Senft of the Indicator Warehouse.

Mark Twain said: "There is nothing is more uncommon than common sense."

I can't help but think of that statement when I see how some traders approach the market, in particular to their expectations of what the market should yield on any given day.

Don't get me wrong, I'm all for being optimistic; however it is unreasonable to assume that the market will "give" you a tradable session every day.

Not all sessions are created equal. Some days, the market will trend like a rocket and others it won't go anywhere. It's those non-trending days that seem to cause all the problems. Yet, people try to "force" the market to give them a profit, but they usually end up only getting losses in return.

It's important that as a trader you realize that some days will be choppy and not have any follow through. You need to be able to recognize those days and be prepared to either trade carefully or avoid them altogether.

In recent weeks the US government shutdowns have been playing havoc with the markets. Neither the bulls nor bears have a handle on what is going on. The result has been a very choppy market. And no trading system, no matter how good, can handle a choppy market.

Choppy markets, by definition, have little or no follow through. So unless you're on the exchange floor, scalping for 1/4 points, you probably have little hope of making a consistent profit in a choppy market.

A choppy day's trading usually goes something like this:

You get a good signal, take it and the market immediately reverses and stops you out for a loss.

You get another good signal; you take it, the market moves towards your profit target, but before finding your target, stalls, and reverses on you for a loss.

You're getting annoyed with the "bad" signals, so you pass on the next signal, of course this is the one that does work out, but you missed it. (In hindsight you come to realize that this was probably the move of the day, but you don't know that yet so....)

You take the next signal only to have it fail again. Now you're thoroughly annoyed and tempted to "revenge" trade to get even with the market, which only leads to more losses and more frustration until the session finally ends.

The real danger of trying to make the market give you something it's not prepared to give is that it leads to a series of losing trades, increasing frustration, and the tendency to overtrade, which could potentially damage your account.

I had a trading friend who used to refer to these sessions as the "abattoir," which means "slaughterhouse." He said that that was exactly what happened to anyone who tried to trade an undecided market, they'd get slaughtered. I think he was right.

So don't be like the other traders rushing into the slaughterhouse to get butchered. If the market is acting choppy realize that it's going to be a difficult day and take steps to protect yourself and your account. Use your own common sense. It doesn't have to be that uncommon.

By Erich Senft of Indicator Warehouse

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