Whilst much is written about the many aspects of trader psychology little is written about how boring trading can be as you either wait for an appropriate signal to appear or you sit with an existing position. Trading requires a great deal of patience – the problem is that everything associated with markets seems to be designed to defeat even the calmest of traders. Traders are constantly assailed by noise and various invocations to trade either from mainstream media or the new somewhat frantic voice of social media.
This was particularly true last week as markets had a small hiccup followed by recovery. If we look at the moves last week on the S&P500 we see the following –
The move on 20/09 followed on the tail of falls the preceding Thursday and Friday which added to a fairly weak September. This combined with the imminent approach of October caused many traders/commentators to turn to water and immediately proclaim the end of the world…again. If we have a look at the S&P500 over the past year we can see that drawdowns are not an unusual thing.
However, if you lack patience you are inclined to do silly things in response to the noise that the market generates. Consider the chart of the VIX below.
As the market slipped on 20/09 traders rushed into the VIX with commentators proclaiming that it had broken out of its base. Unfortunately for them, it hadn’t – price was still firmly locked in its channel. It had tried to breakout but it had failed. A breakout is any move that sees price clear a major line of support or resistance it is not price sticking its head beyond either of these two.If we run the tape of the VIX back to when COVID was beginning to make its presence felt we can see what a true breakout looks like.
In this example, you can see price moving cleanly beyond previous highs and establishing a new trend. The key to trading this move was not only that the market followed through on the initial price action but also having the patience to wait for this to occur instead of being spooked into a position by noise. In trading, there are several ways to lift the profitability of an account – perhaps the easiest of which is to avoid taking false signals. Each time you jump into a position that is not confirmed by anything other than noise you are adding friction to your account and friction costs money.