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Market Commentary
Trading Through the Summer Slowdown
Summer Time!
Trading in a low volatility environment can be exceedingly difficult, especially when it comes to trading in the index markets. As we discussed and reviewed in the last article, trading in index systems can be highly profitable given the right set of parameters and a market with movement. The second part of that equation, though, can sometimes prove difficult. Coming into the summer months, we will experience what is widely known as the "summer slowdown." As traders and investors alike head off on vacation, settle in for the summer and generally relax their interest in trading, the market will become much more choppy and aggressive, and the movements that you will see will occur on low volume with generally little follow-through. When trading a mechanical system, this can prove to be a problem, especially if your model depends on a higher volume or higher volatility environment. I find that many traders will relax trading or simply cut off systems during Q3 trading. I am here to tell you that this is NOT the right thing to do. When trading a system, you want to make sure that you stick through all periods of trading, especially the whipsaw summer period.
What is a whipsaw, and how can I trade through it?
The word whipsaw usually comes with mental pictures of trading signals being fired off back and forth, always seeming to put you on the wrong side of the market. The summer months are especially bad for whipsaw trades, and traders find that these periods are some of the most trying both on your emotions and capital! With light volume, low follow-through, and a general disinterest in trading, this quick "about face" has the potential to whipsaw you out of a seemingly good trade, especially during a swing trade. August is especially bad, as families try to squeeze in a couple of weeks away before the children have to go back to school. The absence of some of these traders leads to a slightly thinner marketplace, which in turn can lead to larger daily ranges and the resulting whipsaw trade.
Now that we have defined that it is, how can you avoid being whipped to submission?
The most important thing you can do as an index trader is to use strong technical trading systems that have documented track records of success during the light summer months. This is one period of trading that repeats itself time after time, year after year.
Make sure that you find systems that are DAY TRADING in nature, since swing movements are tough to find in a choppy environment. Do your best to find systems that will let some choppy movement clear early in the day, and wait until mid-session to determine their entries. We have found that during lighter volume periods, the first half of the trading day is spent in perpetual chop, and the second half is usually the place to find a temporary trend to trade on. During this period, be especially patient with the systems. You will probably find that you trade less overall, and that your winners and losers are smaller overall vs. the normal course of trading. Be prepared for draw down, but also be prepared for quick recovery from those periods. It is not uncommon to see large winning trades from day trades where the market finds direction and follows through. Be prepared to see the markets look bullish one day and bearish the next, and make sure that you focus your attention day to day, and focus your trading on the movement at hand!!!
Lastly realize that whipsaws are a part of trading. Regardless of how well you search out your trading systems, whipsaws can still occur. As unpleasant as whipsaws are, try not to let them affect you too much emotionally. Avoid the desire of trying to "get even" with the market. This rarely works and will usually only make matters worse, likely resulting in yet more whipsaw trades. After all, we are dealing with an uncertain future. Sometimes the market will behave as it is supposed to, and other times it will not.
Whipsaw season will pass soon; just make sure that you stick with your system through all periods. The testing that you did and the results that you used to make your decision to trade a system INCLUDED the choppy periods. There are always diamonds in the rough, and you will usually have a few good trades through these tough periods.
Pattern trading in the market is also a very important way to scathe off draw down and increase overall profitability. Mixing the power of trading systems with the insight of a professional trader can help you stay away from obvious repeatable pattern trades that you want to avoid! For example, over the past month, there has been a repeating trend that some of the day trading systems have been caught it. The market opens a bit higher, than immediately (within the first thirty minutes of trading) rockets to the upside. It flattens out mid-day (this is where most systems catch a trade to the long side), and than sells off aggressively through the close. This "table top" trade tends to catch systems on the long side and causes losses. You can avoid this by not trading the range in the afternoon. If you see a gap open and aggressive run-up (or run-down), followed by consolidation, I recommend hanging it up for the day and not trading at all. Wait for the market to stabilize and do not get caught in a reversal movement on light summer volume!
How can a system help me?
Summer whips and chops are some of the most difficult times to trade through. The desire to throw trading away for a few months and focus on relaxation is a battle that most traders fight every year. The best way to counter those emotions is to have a system assist brokerage help you to select a day trading index system, and subsequently manage and execute it for you. These day trading systems are fixed indicators that do not change, and will not get caught up in the emotion, fear and greed of trading the markets. In this sense, you will have a professional trader watching out for your account, making sure you take every signal traded at times. Furthermore, with the light volume of the summer months, fill quality becomes a large issue. With less depth of market, finding a trade at your desired price point will become more trying. By combining trading systems and execution models, you will be able to trade much more effectively throughout the summer months and throughout the year as well. We will help you deal with the emotions that come with trading choppy markets, and you will see that using a system can provide you with a much more positive outlook on trading, and will enable you to have a much better summer!
About the Author
With over five years of experience in the commodities market and as a Senior Account Executive of Wisdom Financial, Inc., Zachary Oxman is dedicated to meeting and exceeding his client's needs. Through the use of mechanical trading systems and technical/fundamental analysis, Zachary provides a complete picture of the markets and how they can work in your personal portfolio. As a client of Zachary's, you are part of an elite group that benefits from his dedication to customer service, knowledge of the futures markets, prior experience in the high-technology industry and his exhilarating energy.
Futures and options trading involve substantial risk.
