Avoid the Pitfalls of Sideways Trading
07/29/2014 6:00 am EST
There are a lot of costly mistakes that can be made very easily when trading in a sideways market, says Ryan Mallory of SharePlanner.com, which is why he explains the type of diligence required and the steps to take to avoid a tremendous loss of capital.
Trading requires a lot of diligence, especially with the month of July where the market from its opening price on July 1 through Friday's closing price only moved 16 points on the S&P 500.
That's less than 1% of the market's current value.
As a result, it takes a lot of time and diligence to consistently profit in such a market. There are a lot of factors that can lead to making costly mistakes as well: from overtrading and lots of commissions to frustrations of seeing winners turn into losers. You also have the lack of solid winners that run nicely and the absence of momentum in the market indices.
If you're not careful this can all lead to a loss of capital that can quickly dig you into a deep hole.
As a trader for nearly 20 years now, I have learned to consistently profit in all market types.
And by far the hardest market to trade are the ones where there is little to no trading range. However, profiting in them is still possible. For one, you have to lower your expectations for what you can take away from the market. In a rising market, if you are accustomed to booking profits of 8-10% on your swing trades, then in a sideways market, you may have to be content with 2-4%. On the other side of trading, you must, and I repeat, must keep the stop losses tight. If you are only taking away 3% in profits from your winning trades on average and that means your average loss needs to be no more than 1.5%. While I have had some losing trades myself this month, I have managed to keep them to an average of 1.1%. That is huge, because making a profit this month becomes so much easier when you can keep the losses insignificant in your trading while managing to let the winners run between 2-4%.
For instance, I booked profits in Kate Spade & Company (KATE) at 39.76 for a 4.4% profit on Friday, which is four times the amount in profits, compared to the average loss that is incurred.
By Ryan Mallory, Founder, SharePlanner.com