When Should You Stay Out of the Market?

12/30/2012 8:00 am EST

Focus: STRATEGIES

Anne-Marie Baiynd

President and CEO, TheTradingBook.com

It's just as important to know when to stay out of the market as when to enter a trade, says Anne-Marie Baiynd.

For many traders, staying out of the market is just as important as when to know how to get in.  My guest today is Anne Marie Baiynd to talk about that, so Anne Marie, not having a position is just as an important position as actually being in a stock or an option, whatever it may be.  Is that correct?

That is correct.  See, for most of us it’s really not how many good trades we can make, it’s how many bad ones that we don’t, so, I mean, if you think about—if you could think of all your trading career and you could just cut out two-thirds of the bad ones, how much bigger would your balance be, and so staying out is really critical and I really think that’s the difference between a successful professional trader and a novice.  They know when to sit on their hands.

Trading is an imperfect science, so how do you know—I think traders are always waiting for the perfect opportunity and they may stay out of the market when actually they should be in.  What’s kind of the balance?  How do I know that it’s a good enough opportunity to get in, but, and when it’s time to sit out entirely?

Right, that’s a really complex question, and the answer really determines really what kind of style or strategy that you have, so let’s say you’re a standard momentum trader, like most of us are, there’s really a certain way that the market looks and feels, and what we have a tendency to do is just pile on technical indicators and look at the technical indicators, as opposed to the things that create the indicators, like the price, and so if you focused more on the price, you could see where support and resistance come in, and learn to wait for that, because that’s the number one thing that we traders have very short supply, patience pretty non-existent for us, and so instead of waiting for that area, we don’t, and so in terms of saying what’s the ideal space, it really is from a momentum perspective you want to be in the space where enough folks are going to trade with you, so you’re not going against the grain, but you don’t want to be the space where people are getting exhausted from buying.

Is there a time when you absolutely should not trade?  Whether it be Non-Farm Payroll or some big earnings announcement—Apple earnings—or something like that.  Are there times when you just say I will not be in the market no matter how it looks?

For me, absolutely; that’s really true.  FOMC meetings, FOMC minutes, I don’t really like to trade—when it’s oil report, I trade oil, and so I don’t like those.  I’ll try to stay out of anything bit, but here’s the thing.  I say this all the time; people think that it’s not true, but it really is.  A stock option, equity, whatever is always on its way someplace, and if the payrolls, unless it is materially detrimental, like, for instance with a stock that’s releasing, if you find out the CFO’s been embezzling, that’s materially significant; if they’ve lost their supplier, materially significant, but if they just report shy of earnings or they just report shy of revenue, those things correct themselves over time, and so if you just think about that, it’s a lot easier to step back, let them pull into a space, and then slowly walk in when the rush is starting again.

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