This is a repost from a comment I made recently on the Mentor Program Alumni forum. I think as traders/investors we are all guilty of getting too close to the problem; the end result of this is that we cant actually see a solution and we keep doing the same thing over and over.
I have been listening to some of the frustration that has been expressed with regard to the relative lack of action in fx/index markets over the past few months and I share that frustration. At present they are shithouse (technical term).
I only have two index positions running in the current portfolio and neither of them are setting the world on fire. Frustration is a somewhat of a natural state for trend followers since we want the world to move – we don’t care where so long as it moves. Stagnation is very tiring. However, up until this week there has been one market that is moving – US equities.
My perception is that we often think that to be successful we must have certain markets in our portfolio and we often assume that at least one of those markets will be moving. Unfortunately, at present that doesn’t seem to be the case, which brings me to the notion of fluidity. If a market is not working then leave it alone and migrate to those which are. This is the approach I have taken over the past few months and as a result 95% of all my positions are in US equities. Since I have an unconventional view of diversification this doesn’t worry me. I am only interested in being where the money is.
This raises the question of how to tackle markets that are not moving because sooner or later they will begin to move. Each persons approach will be somewhat idiosyncratic. My first move is to step and ask myself what am I trying to achieve, what role are these markets serving and what will convince me to get back in? For me the last question is the hardest since this involves moving from partial risk to full risk. I try to establish major points of resistance/support that would be impossible to ignore – these act as gatekeepers for me. until they are breached then I do little more than nibble at trades. For example at present the USD/EUR is channeling down but it is range trading within the channel. The boundaries of the channel are my landmarks. Likewise with the USD/YEN which is simply going sideways.
I think stepping back from markets momentarily is a good thing since it enables you to reevaluate what is happening in a more dispassionate way. The markets will still be there when you get back.