How to Trade Non-Trending Markets

08/07/2012 2:38 pm EST

Focus: STRATEGIES

Anne-Marie Baiynd

President and CEO, TheTradingBook.com

Trading range-bound or sideways markets require specific methods. Professional trader Anne-Marie Baiynd shows you how to trade non-trending markets.

How should we be trading non-trending markets?  We are talking about that question today with Anne-Marie Baiynd.  Is there anything specific that traders need to know about markets that don’t appear to be trending up or trending down? Maybe they are just going sideways, what should we be doing?

Well, of course there is a very strong mechanic to trade a large non-trending event.  We sit in a channel and we will trade from the top to the bottom and from the bottom to the top, but in general, many of us really don’t notice we are in a channel until after we have made a series of bad trades.

So my philosophy is this; make a stock force you to trade it.  Let there be a real reason that you take the trade. Otherwise, why are you trading it?  Oh, just because my technical indicator says go long here or go short here. That is not a good enough reason to trade a stock.  Trade a stock when it’s ready to move, when it’s ready to fall out of bed, when it’s ready to go to the moon, and leave it alone after that. Because at the end of the day, we are just here to make money, right? 

If we are sitting in a non-trending event, that means price essentially goes nowhere. And if price goes nowhere between my buy and sell, all I am doing is wasting commissions.  I think that a lot of folks really want to trade so it doesn’t matter if it’s non-trending—if my technical indicator says that, I am going to go. But here is a very true fact; most trading systems will break down when there is no momentum, and non-trending markets are absent of momentum. 

Let me follow up on something you said a moment ago—that if you really are going to make a trade the stock has to prove it to you.  What would you be looking for for that kind of proof?

Ah, great.  Let’s say that a stock has been moving up and it looks so good you just can’t wait to trade it, because it looks like it is going to the sun. You have to wait, because if you trade on breakouts, or you follow an extended trend, you really are not very conscious of where the trend is going to.

But if a stock with great momentum begins to pull back and it comes back into rock-solid support, oh my goodness, I am ready to back the truck up.  That is the event that you go, wait!  You pulled into support, you are holding it, now I am going to ride with you—that is what you want to see.  You want to see it come to a space where everybody is hungry to get in. 

And it sounds like what you are saying is that in a non-trending market that kind of situation is pretty unusual. 

Yes, it is very unusual.

Okay.  Let me also ask you about indicators that may or may not work in some of these markets.  You did say that many of these systems will tend to break down, but people nonetheless will probably want to be applying some of their usual indicators.

Right.

What should they be doing differently?

Well, the bottom line is this; for us to make money we have to buy low and sell high or sell high and buy low.  We need movement.  So in a non-trending market you can find pockets of movement, you just have to work on much smaller timeframes and be conscious of the fact that at any time you could have reversal. 

So I share with folks that the best thing to do if you really want to trade in a non-trending market—which I recommend that you don’t, but if you do—make sure your size is small, because risk has got to be managed in an environment like this.  It will take you for everything if you are not paying attention.

Oh, good words of wisdom there.  Thank you.

Thank you.

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