The Art of Staying Away

11/12/2015 8:00 am EST

Focus: OPTIONS

To win in trading, sometimes you have to just sit on your hands and do nothing, instead of chasing a trade, says option trader Greg Loehr of OptionsBuzz.com.

Ever had a trade go against you in just one day (or even an hour)? Of course it happens, but there may have been some warning signs that you missed that might have kept you out of the trade. Here are a few to consider.

  1. Volume. I'm talking about stock volume here. In a previous live trading session, I passed on a bearish trade on Garmin (GRMN). I had been watching this stock, as well as TRMB where we had had a couple nice winners. GRMN had been taking it on the chin at the time and I was considering another bearish trade.

chart
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Looking at the chart above, it seemed that the stock was continuing its downtrend, but the stock volume at the time was extremely low. Indeed, in this end-of-day chart, above, you see that the volume was low all day. Low stock volume can indicate a lack of conviction in the movement. With this perceived lack of conviction, I also took into account the fact that this was the first move (see #2) below that little support level you see on the chart. These two things led me to pass on a bearish trade.

Here's what happened the next day:

chart
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The stock opened higher and never came back. The bearish trade I considered would have been a losing trade; but here's where passing on what would have been a losing trade is considered a winning trading decision.

2. The "one-day" move. One up-day doesn't constitute a rally. One down-day doesn't constitute a sell-off. As in #1, you're looking for a little bit of conviction behind a move; and trying to avoid the "head fake" move. This GRMN chart is a perfect example of the this. Combining this idea with the first and you have to be thinking about passing on the trade.

3. It's just not all there. Before pulling the trigger on a trade, everything should look perfect. If even one thing is out of place, why are you trading it? If something's amiss, and you trade despite that, then this falls into the category of forcing a trade. You don't have to trade; you shouldn't be anxious to trade; and you must be disciplined enough to hold off when everything just isn't right. Maybe it's volume; maybe it's the implied volatility level for a straddle trade; or maybe it's the amount of stock movement needed for a trade to reach a certain profit or loss level; if all of the things you like to see in a trade aren't there, then pass.

4. You're in love with the underlying. I've seen this a lot over the years that I've been teaching. People want to trade what's popular. Or someone is convinced he's found the next diamond in the rough and wants to "find a trade on it." If you find that you have to place a trade on a particular stock, then you're looking for a reason to trade. A trade on AAPL is no better or worse than a trade on GOOG. What you need are consistent, objective reasons for getting into an option trade. "My brother-in-law works for the company and says it's a good stock" is NOT a reason to trade something. So be careful falling in love with a stock. Love hurts. We all know that. Don't be afraid to check out some other stocks when no one is looking.

By Greg Loehr of OptionsBuzz.com

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