Challenging markets test our resolve and our patience and our strategy. It is during such markets that traders who lack patience often abandon their strategy or change something fundamental about their strategy. While such a change may work in the short-term, once the market gets back into alignment, their changed strategy then fails. Often, the trader does not realize that they must now change their strategy back into its original form for it to work again since the markets have returned to behaving in a manner that is more regular.
2011 has been one of the most challenging years in recent history as the market has not sustained any consistent trends, either up or down. Indeed, profiting from stocks has been challenging to say the least. We have bought some pocket pivots but in small doses, then have been quick to sell due to questionable action in the general markets. Only a handful of names such as SLV/AGQ or MCP have been profitable.
During times such as this, it is best to take your drawdowns, and wait patiently for the window of opportunity to open up again before buying full positions. It is also during times such as this when it is vitally important to understand that your losses are due to difficult markets and thus your overall strategy, assuming it is sound, should not change. As an example, between April and Oct 1999, the market was in one of its most challenging, difficult periods, with the level of volatility high with no discernible trend though grinding higher. We recall that a number of strong traders, including ourselves, had substantial drawdowns during this choppy period. In most cases, had these traders abandoned or changed their strategy due to impatience and dissatisfaction with results that were mostly due to the market environment rather than any flaw in the strategy itself, they would not have been able to capitalize on the ensuing strong uptrend that began in October 1999.
It pays to remember that position sizing and risk management are two very important variables, and it is up to each investor to find what risk tolerance levels work best for their trading personality. And always adhere to your stops. There will always be new, consistent, and identifiable trends in the market that disciplined traders will be ready to capitalize on when they occur at the moment that the optimal window of opportunity opens wide.