Last week’s action in the market was somewhat concerning. Tuesday had a fairly good sell-off.  Wednesday had a huge rally off the lows accompanied by good volume. It looked as though there was a short-term bottom in place. Then Thursday, the market gave back all the gains from the previous day.

As a swing trader, I have found that successful trading is an odds game. When the odds are mounting in your favor, you take advantage of them.  On the other hand, if the odds are getting away from you, sit on the sidelines. After last week’s swelling of contradictory action in the market place, I’m starting to look for the comfort of the sidelines, at least until the waters start to clear. Besides, you really can’t get hurt sitting on the sidelines.

One of the more valuable lessons I have learned as a trader was to not force a trade.  I will always be willing to sit in cash. There is an unintentional pressure traders put on themselves to be always trading or they feel as though they didn’t accomplish anything. But nothing could be further from the truth.  Remember the first rule of trading is to not lose money.

As I mentioned earlier in the column, when the odds are starting to mount against you, get out! Consider some of the following:

1. As of the beginning of August, the market has been under selling pressure. Tuesday’s sell-off should have been followed by more pressure to the downside.  But it wasn’t.
2. Wednesday’s rally with strong volume seemed like a reversal at hand, at least for the short term. But it wasn’t
3. Thursday oil prices went below $60 a barrel, which should have been great news for the market considering the negative impact higher oil prices have had on the market. But it wasn’t.

So much of trading is a mind game. As with golf, you need more than a good swing to be a winner on the tour. You also need mental toughness.  When trading is going well, you’re on top of the world.  When it’s not, everyone around you knows. One of your tasks to be a successful trader is to make sure you are mentally on an even keel. I have seen many traders that felt when they were out of sync with the market that trading more would get them back on a winning streak. Unfortunately, the opposite happens and they inevitably lose more capital and get more out of sync.

I will be discussing the mental part of trading in the upcoming weeks in much more detail. In my opinion, it’s one of the most overlooked and underutilized aspects of trading. 

Getting back to the market, until some definitive pieces of the puzzle fall into place, I am remaining in my short positions and tightening up some of my stops.

Tom Incorvia is a swing trader with 18 years of experience in the financial markets.  E-mail him at tincorvia@gmail.com.