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Three Tips When The Market Is Doing Nothing

10/07/11 09:25:24 AM
by Billy Williams

When the market is in limbo, when you don't know what to do till the trend emerges, do these three things to succeed.

Security:   AZO, OPEN
Position:   Hold

Back when I was younger, I was looking for some kind of work but wasn't qualified to do anything except mowing lawns. Somebody talked me into giving sales a shot. I ended up getting a job selling cars, of all things, and showed up to meet the general sales manager. I showed up in this guy's office wearing my grandfather's oversized suit and stood up as straight as I could, hoping he would notice that I was wearing a real tie instead of my customary clip-on.

He was a hulk of a man who looked up from his desk long enough to snort and said, "If you're not talking to somebody, then you're not selling. And if you're not selling, you better sharpen your axe if you want to make it." He then dismissed me, signaling I should leave.

My team leader was waiting for me in the hall and saw the blank look on my face and smiled. Then he told me a story: "Two lumberjacks, the old veteran and young upstart, made a bet one day. They bet on who could chop down the most trees in a single day. The next morning, the young upstart got up before anyone else and chopped trees from sun up to sun down.

FIGURE 1: OPEN. OPEN was once a runaway stock to watch but during periods of market decline, you need to cut stocks like this from your watchlists for longs and look for stronger stocks to trade to the upside once a bullish trend emerges in the overall market.
Graphic provided by:
"At the end of the day, he chopped down eight trees, but the old veteran chopped down 10. Angry at the turn of events, the youngster bet the old veteran double or nothing, to which the veteran agreed.

"The next morning, the young upstart got up an hour earlier, worked twice as hard, and worked into the wee hours of the night.

"At the end of the second day, the young upstart chopped down 12 trees but the old veteran chopped down 20. Furious, the upstart bet double or nothing again, and again the old veteran accepted the challenge.

"At the stroke of midnight, the beginning of the new day, the young upstart began work and chopped trees at a furious pace without food or taking a break till midnight the following day.

"Yet, while he logged 25 trees chopped down, the veteran chopped 40 trees down."

By this time, my team leader had my attention, and I waited for him to tell me the secret.

He explained, "The young upstart lumberjack was beside himself and couldn't believe that the older lumberjack could outwork him because he was younger and stronger and had made a greater effort to win.

"He confronted the veteran and asked him how he did it. The old veteran said, 'You're younger and can hustle more than me, that's for sure. But while you were out working, I was sharpening my axe so when I swung on a tree, it produced a much bigger return on my efforts.' "

FIGURE 2: AZO. Stocks like AZO are the kind that you want to watch during corrections. Even while other stocks fall sharply, AZO exhibits the kind of strength that you want to take a long position in when the bulls return to the larger market as a whole.
Graphic provided by:
I took that to heart. I spent that summer practicing sales techniques, closing, and product knowledge. When I wasn't talking to a customer to sell something, I was honing my skill and craft.

That is what you need when the markets do not lend themselves to trading.

The market is clearly in a gray zone right now, and while it doesn't present any opportunities until it reveals that a new leg down is in progress or a rally materializes to confirm a bottom, you must work at getting better at trading.

There are three tips that serve you well during moments like these, and they are:

1. Identify your biggest mistake in trading.

2. Build your watchlist -- cull your stock list of stocks that no longer meet your profile and focus on the ones that do.

3. Review and rehearse your trading rules for your methodology and approach.

See Figures 1 and 2.

There are leaks in every trader's approach that have little to do with their system or method but more to do with themselves. After a sufficient amount of training and experience, success in the markets has more to do with the execution of your trading method. If you hesitate at pulling the trigger or exiting a position, you must begin by plugging those leaks and getting better at execution in all aspects of your trading.

You also need to spend time culling your watchlist of stocks the way a gardener watches for any signs of decay in his garden. Mercilessly pull stocks that do not meet your fundamental and technical criteria as if you were pulling weeds and focus on stocks likely to yield the biggest returns when using your method. You can't reach any financial target if the vehicle you choose is not compatible with your system or meets the criteria of a high-performing asset.

Once you've identified the weak points in your execution in step 1, you must spend time rehearsing on how to perform at a higher level. Visualization can help you as you mentally rehearse being in a similar situation where you might, for example, have to take a loss. Instead of hesitating in real life, however, you must rehearse it in your mind as if it were happening in real time to build greater awareness of it. Once it does happen, you will be better prepared to adopt the new actions to perform taking losses with machine-like precision, with no hesitation, so it becomes natural. Eventually, what was your weakness now becomes a strength.

This can at times seem boring, but look at it like the market is giving you time to acknowledge the lessons you've learned since the last pause in trading action to polish your game. Improvement is often incremental and by putting in the time, you advance toward mastery, and then after deliberate practice and discipline, what was once hard in trading eventually becomes almost effortless in time.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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