Opening Position
November 2006
THE slowdown in the housing market and a negative report from the Philadelphia Federal Reserve Bank was all it took to trigger a selloff in the markets. This is not surprising, given that a contraction in the housing market would place considerable stress on real estate-related businesses such as banks and building suppliers, which ultimately will dampen consumer spending.
Historically, September has been a negative month for the markets. In anticipation of this selloff, you may have decided to wait for the rally before opening any new positions. Or you may have thought it best to follow the markets closely and trade short at the first sign of a slowdown. Judging by the performance of the broader indexes, however, I am not convinced that the selloff truly has begun. In fact, I am questioning the existence of a selloff at all. This is because although there have been some drastic declines over the past couple of days, it appears as though these declines are battling a very strong support level.
The existence of these strong support or resistance levels has a bearing on trading. In fact, they greatly influence your entry and exit strategies. As a result, they play a huge role in the most important aspect of trading, which is preserving your capital.
Your success as a trader is really determined by your ability to control your risks, and there are different ways to go about doing this. Lee Leibfarth discusses some of these methods in his article this month, "Measuring Risk," which starts on page 20. Each trader has a different risk tolerance level, and after reading this article, you'll be able to measure your own risk-to-reward ratio. You can then apply the money management strategy most suited to your needs.
But what exactly is money management? Unfortunately, not many understand the topic very clearly, but if there were one person I would ask that question and get a coherent reply, it would be trading psychologist Van K. Tharp of the International Institute Of Trading Mastery. You can read his answer to that question as well as his other thoughts related to money management in the STOCKS & COMMODITIES interview for the month, which starts on page 68.
It is likely that by the time you receive this issue, the typical September-October
slowdown may be over, assuming it took place at all. The markets would
be ready for a bull run, and with your (now) solid understanding of money
management, and especially preservation of capital, you'll be ready to
take on any tradable.
Jayanthi Gopalakrishnan,
Editor
Originally published in the November 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2006, Technical Analysis, Inc.
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