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Stock Picks 101- The Best Trading Decision May Be Not To Trade

Douglas Newberry
 


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Trading can get into your blood. You like the challenge of it. You like the reward. However, sometimes the best decision you can make is to do nothing or at most, just maintain the positions you already have. Let’s take a look when this might be so.

There are some predictable and recognizable times when the trading volume in the market is low. Low volume can lead to erratic, unpredictable price movements. These moves can be a challenge to trade, and often have a low risk-to-reward ratio. In other words: “Stay away. ”

Summer is the longest and most obvious stretch of such unrewarding times. “Sell in May and come back again on St Ledger's Day (that’s in September), “ as the saying goes. This quote may approach the banality of a platitude, but it’s still good advice. Why not take a vacation along with everyone else? You’ll need it once September comes along.

Side comment: not all summers have low activity. For example the summer of 2004 provided some good market moves. However, late spring is still a good time to give your portfolio a “spring cleaning” and get rid of positions that just aren’t going any place and probably never will. As an example, sometimes your stocks picks looked good when you entered, but the conditions at that time no longer exist, and you just might not have taken the time to notice.

But summer is not the only time. Trading around holidays can also be slow and erratic. For example, many professional traders take off between Christmas and New Year’s.

There are also some less obvious times when not much is happening in the market. Lately, if the market is anticipating an important announcement from the Fed, it tends to hold its breath. Unless you like to watch paint dry, don’t bother trying to suck a profit out of a market like that.

Don’t let these suggestions lull you into thinking that these are the only times to avoid trading. The market may not behave rationally much of the time, but it does learn from its past. For example, was there any significance to September 11 before 2001? Always be mindful that new patterns are forming all the time, and old patterns lose their hold.

Finally, the market alone should not dictate the best trading times for you. You also have rhythms and timing all your own. There may be certain times of the day, or certain seasons, where you simply do not perform well. Studying your trading diary should give you some hint about when and to what extent these periods exist.

In summary, the market and your personal psyche have “moods” that affect the level of risk you’re taking when entering a trade. Keep that in mind as you contemplate trading. After all “cash” is also a position. And, if your money is not earning superior gains for you in a good position, you might as well have it in cash.

As a Director of Investing Systems Network, Doug Newberry is the consultant for the conceptual development and usability of stocks picks tools and portfolio management software. These trading tools are offered to investors from more than 70 countries.

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