Why I'm on the sidelines

Readers may be wondering about the lack of trades taken and shown here over the last 2-3 months.

Well, that is because of a number of points, some of which have been mentioned several times on previous posts. These are summarised below:

• I was stopped out of all my profitable long positions;
• There has been a lack of decent setups appearing on my scans;
• Of those setups which do meet my criteria, the vast majority have failed to trigger an entry;
• One or two did trigger an entry, but very quickly failed;
• As mentioned in this post, a few did give an entry, however they simply moved too quick, or the proximity of a scheduled earnings release was too close for me to enter the trade;
• I have also noticed via social media that other trend followers, who use different entry/exit parameters to me, have suffered a number of losses, erosion of profits on existing positions and stops being hit. So it wasn't just me - the inherent logic of my own approach (and other traders whose approach is similar to mine) was keeping me out of the market.

As the years pass, I have learned to embrace the concept of volatility, to the point that it is now a central part of my approach. Go read this post for more on how I use volatility as part of my trade selection process.

The market action over the last few days has seen a big jump in price movement and intra-day volatility - certainly when compared to what preceded it - plus we are seeing big overnight gaps in the major market averages, with gaps up and down in individual stocks.

The combination of all these factors has led me to be extremely cautious, to the point of being totally in cash.

I am sure that there are traders out there who have done extremely well the last few days, however the market action simply does not suit my own approach.

2008 was one of my most profitable years, which I discussed in this interview. However, this recent market action seems to have evolved a lot faster than it did back then, when I was able to slowly build up some profitable short trades before volatility really spiked and the downtrend accelerated.

I also know that in the last quarter of 2011, I struggled. That was also a volatile period, and it was easy to erode equity because of all the whipsawing around. I'd like to think that I have learned from that experience and am putting the knowledge gained to good use. In other words, I'd rather be out of the market looking to get in, rather than being in the market wishing I was out.

Either way, given the gyrations in the market, I am happy to be on the sidelines, but am busily keeping an eye on stocks which may be setting up. In addition, I am also looking at the forex and commodities markets for potential opportunities.