Right Now Patience Is a Virtue for Traders
By Martin Tillier - Nov 20, 2015, 4:35 PM CST
The words “patience” and “traders” can rarely be found in the same sentence without a negative somewhere in between them. By its nature, trading appeals to people with mild forms of adult ADD. The short time span of positions and the need to split your focus between the actual things traded and things that may influence them, such as dollar strength and bond yields, would seem to make it an ideal occupation for those with the attention span of a flip flop. In fact, though, successful traders are perfectly able to act that way, but also have to have enormous patience at times.
For those who focus on trading energy, whether the commodities themselves or related stocks, now is such a time. It should come as no surprise to anybody that $40 has emerged as a support level for WTI. The actual low from 3 months ago was just below $38, but the human tendency to look for order and therefore our love of round numbers has made $40 the stopping point for this drop. As we hover around there, there is little advantage to predicting whether the next move will be a bounce back up or a break down to the mid to upper 30’s and beyond. It makes more sense to just wait and see.
That is not to say that traders shouldn’t trade, but that they do so with the understanding that either of the above scenarios could unfold in the short term, and each is equally likely. That means that any intraday positions should be accompanied by fairly close, tight, stop losses and the focus should be on…
The words “patience” and “traders” can rarely be found in the same sentence without a negative somewhere in between them. By its nature, trading appeals to people with mild forms of adult ADD. The short time span of positions and the need to split your focus between the actual things traded and things that may influence them, such as dollar strength and bond yields, would seem to make it an ideal occupation for those with the attention span of a flip flop. In fact, though, successful traders are perfectly able to act that way, but also have to have enormous patience at times.
For those who focus on trading energy, whether the commodities themselves or related stocks, now is such a time. It should come as no surprise to anybody that $40 has emerged as a support level for WTI. The actual low from 3 months ago was just below $38, but the human tendency to look for order and therefore our love of round numbers has made $40 the stopping point for this drop. As we hover around there, there is little advantage to predicting whether the next move will be a bounce back up or a break down to the mid to upper 30’s and beyond. It makes more sense to just wait and see.
That is not to say that traders shouldn’t trade, but that they do so with the understanding that either of the above scenarios could unfold in the short term, and each is equally likely. That means that any intraday positions should be accompanied by fairly close, tight, stop losses and the focus should be on trading into what I call a “free position”. This morning, for example, trading January WTI futures, I took a long position when the December contract touched $40 with the intention of reversing the position (selling double my original position) if oil broke lower, say at 39.85, or, if it bounced off of the level, at around 40.20.
If the break of $40 had come I would have been short at 39.70 but, as it happened, $40.20 was hit first, leaving me short at an average of $40.40 (Bought, say, 10 at 40.00, sold 20 at 40.20). I then let that run with a stop loss set to ensure that the worst possible result was a small profit. That is what I mean by a “free position”.
The same technique can be used by those trading stocks with longer time horizons, but for those who have neither the ability nor the desire to sit at a screen all day and watch levels closely a simpler strategy is just to be patient. Most of us have identified some stocks that we would buy when oil breaks lower by now and the longer oil hovers around these levels the more tempting it is to pull the trigger on those ideas. That, however, would be a mistake.
If we really are forming a bottom for oil, then the way is cleared for a run back up to around $50. In that case, waiting for confirmation and a 5 percent or so bounce off of $40 loses little in opportunity cost. If, however, as I suspect will happen, traders push through and test the lows again you would be looking at either cutting close to a clear support level or running positions to where losses would really hurt. It doesn’t take a trading genius to see that neither of those options is exactly appealing.
In many ways I guess it is strange to write a piece recommending doing nothing. As a youngster in the forex market, however, it was impressed on me many times that, for a trader, square is a position too. With two support levels for oil relatively close together and futures hovering around the first of them, square is probably the best position to have right now. That means that traders of all stripes should draw on their reserves of that rare commodity in their ilk, patience.
