If you want to make money trading you have to play by the rules

The other week I was given a gentle reminder from the market to play by the rules.
You see, I felt our markets were too high. I felt the shares had been ramped up in price for the quarter end. I felt there was not enough good news to sustain the markets continued climb. I felt the market should be coming off…

On Friday, the 8 July, we had U.S. unemployment figures come out higher than expected at 9.2%. This was an increase in unemployment as opposed to the reduction the market was expecting. Within 20 minutes our JSE Top 40 index fell 500 points and the Dow Jones Index fell from 30 points up for the day to 110 points down.

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Now, given my view and the fact I had been sitting short for the four days preceding this announcement, one would be forgiven for thinking I was happy to see this sudden pull back in the markets. The reality is I was hugely disappointed when this figure came out and our market started to collapse.

I broke my own rule and the classic market saying, the trend is your friend. You see, even though I felt the market up-move was overdone I failed to wait for the uptrend to change direction. I had tried to call a top in the market.

By going short on the Monday, without waiting for a sell signal, just because I felt the markets were too high, I opened myself up to a losing trade. What I did here is the financial equivalent of seeing a stampeding bull in full charge, deciding he’s gone far enough and stepping in front of him.

It’s not going to end well.

After I went short on the Monday the market continued to run for the next three days, eventually hitting my stop loss on Thursday. Then, the very next day, the market pulled back on the U.S. unemployment data.


The result was, I took a loss, only to watch the position move back in my favour with me not in it.

At first I was complaining about how unlucky I was with my timing. But then I thought to myself, if I had only waited for the trend to change and the market to turn, I would have been able to go short at a much better level and make money off this down move in the market.

It was not my stop loss that cost me money. If the up-move had continued, the stop loss would have saved me a fortune. Rather it was my lack of patience that cost me money. Waiting for a signal would have saved me money and allowed me to make a profitable trade.

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So as a note to myself and to you

When trading, be sure to trade with the market and if you feel a move is overdone, wait for that move to be over before you look to get involved.