Little bit of up, Little bit of down… Little gap here, Big gap there…
Probably not the best trading conditions, right?
So what’s all this chop mean for us going forward?
While I don’t have a crystal ball, here are my thoughts:
One—more chop in the market can mean more time on the sidelines.
Not taking the wrong trade is just as important to your capital growth as taking the right trade.
Preserving capital is key when times are tough… but it doesn’t mean there are no trades… it just means you have to be more selective.
Two—you can adjust to a trading style that works well in a choppy market.
Want to know how I plan to tackle the rest of October, and how you can come out on winning, despite all the chop…
Look at the blue rectangles in the chart of the SPY below.
Can you tell the difference? Other than the first one is August and the second one is October, they look a lot alike…
Basically just a bunch of nonsense… and that’s due to what’s happening in the world… nonsense from politics, trade wars, global economy, economic growth, economic stimulus…
With so many balls in the air, no one knows what the future holds… and there is nothing investors hate more than uncertainty…
Hence the market “chop suey” – a little of this and that in the chart of the SPY –
So what steps can you take to survive and profit right now?
First decide if it makes sense to trade at all. If your system simply doesn’t work in choppy markets, not trading is the correct trading decision.
Now if you do decide to trade, another thing that can help is to change your expectations. In a more clearly trending market, you may have been able to pull profits from big swings in your trades.
But in this wildly choppy market you may need to reign in your profit targets, so don’t get greedy here… small consistent gains will equal big profits in a choppy market.
The second step you can take is to look at different strategies to make money in this type of market…
Support and resistance are your best friends right now.
Buy at Support and Sell at Resistance… Play the range.
When stocks are choppy, they aren’t able to get the supply or demand needed at critical levels to push the price through and break out.
This can be money in your pocket if you trade it right… look to buy at the support levels and sell at resistance.
There can be a lot of profits in this strategy, you just have to keep your stops in line so you don’t get caught when the stock finally decides to break out again.
The SPY chart here shows the support and resistance areas in play during the month of August. You can see a “play the range” strategy definitely had some merit that month.
Another great tool for a choppy market is an oscillating indicator like the relative strength index (RSI). When stocks are in choppy markets, traders tend to pay more attention to the oscillating indicators like RSI…
The RSI creates an indication of when a stock is deemed to be overbought or oversold… thus providing buy and sell triggers based on price movement.
Many studies have shown that oscillators perform best during choppy markets, due to the fact if a stock is trending, a stock can stay overbought or oversold for long periods of time.
In the choppy market, the stock price will roll between those extremes more cleanly, as seen in the chart for Gilead Sciences (GILD) below.
And why just play the range when you can add an indicator like the RSI for added confirmation?
In the GILD chart below, you can easily see the oversold and overbought conditions on the RSI match up with the Support and Resistance levels quite cleanly… giving you added confirmations on when to buy and sell in the range.
So while October may be looking a lot like August so far… all is not lost when you are in control of your trading decisions…
Sit on the sidelines while the market looks for clarity, or simply change it up a little with smaller profit targets… or change it up a lot with a play the range strategy, and make money in the chop.
The only bad decision is to trade a system you know won’t perform well in this market. Get more more guidance on how to trade and just as importantly when to trade…