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Respect Cycles To Keep Your Money Safe

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Once a trader understands market cycles, they start to truly understand and see significant progress.

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I am not so sure people would believe me nor give me much credibility if my common theme was "Making money in the market is easy." The irony of it all is that I feel making money in the market is easy but keeping it is the hard part.

Whenever I meet a new trader my primary goal is to impart to them what I have learned over the years to help them grow, but my job as a teacher is much easier if a person can simply stick with trading long enough to experience a few market cycles. The bottom line is that when you are a trader there will be certain times when the moons align and stocks do exactly as you desire them to do.

Then, all of a sudden, out of the clear blue, things change. Reversals set in, stocks that went up every day now fall back to Earth and the general mood abruptly shifts from euphoria to disgust.

It is at this time where a trader can easily give back all of the recent gains and much more unless they have learned what actions to take. When I start to see two or more of my trades reversing and turning red, I will immediately pull in the reins and look to raise cash.


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We have all met a person that tries their hand at trading during one of these euphoric cycles, putting some capital on the line only to see it grow rapidly. They increase their exposure, not understanding risk management, and sooner or later they are squashed like a little bug when the market turns on them. Unfortunately, when a person goes through this cycle they are often done with trading forever. They immediately feel as if the game is rigged against them and trading stocks is a sucker's play.

Markets have and always will move in cycles. The key for every trader is to first realize, recognize and respect this choosing to trade with the trend or go with the wind at your back. If you favor the long side, as most do, then learning when to step aside and let the market run its course is extremely valuable.

Jessie Livermore, one of the greatest traders of all time, used to say that "you can beat a horse race, but you can't beat the races." He would often say this as he was preparing to embark on one of his many trading vacations when he simply didn't have an edge on the market.

One of the hardest things for a trader to do is to stop trading. The general understanding is that successful traders are always in motion, seeking out trades long, short or a mix of both. While there are many who follow this path, the most successful traders I have ever come across know when to play and when to sit. They have no desire to risk hard earned gains or deplete unnecessary capital when the market does not favor their style.

The biggest challenge for participants is to actually recognize when these trends are changing. I have often found that probing individual stocks is the best method for learning of what the market is truly doing but it can also be an extremely dangerous thing to do as small losses can mount creating substantial damage.

Typically, whenever I start to see trades not act as I would desire them to, I immediately reduce my position sizing dramatically. I will continue to incur small nicks but I seek to limit them and chalk them up to research expenses.

For most, I encourage paper trading if the account size does not afford the ability to significantly reduce trading exposure. Once I see trades starting to work, I will immediately start to increase my exposure with the goal of catching the next wave of activity. Today, for example, I have probed the market with new positions in Omnicell (OMCL) and Oceaneering International (OII). So far these stocks are reversing and telling me it is still too early to try new longs. If they were to close strong and catch bids, I would continue increasing my exposure and look for new ideas.

I realize it is hard to believe but over the years I have learned that making money in the market is easy but keeping it is the hardest part of trading. Once a trader understands market cycles, they start to truly understand and see significant progress.


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Position in OMCL and OII.

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