Prop Traders Can Sit On Their Hands

One of the greatest advantages you have in being a prop trader is that you have the right to not participate and that is a powerful advantage to have over the rest of the marketplace. If you’re just starting out, read this carefully.

You’ll find this advantage especially beneficial when you are confused about what’s happening in the market. If you’re used to trading gold or crude and the experts are having a tough time figuring things out in those markets, don’t beat yourself up for being unsure. Sitting on your hands, so to speak, is a way of preserving capital and the greatest traders on the planet are great traders because they played the best defense.

All this chatter about Greece, PIIGS, Gold and Crude oil…no one has mentioned what happened in March Sugar #11 the past few trading sessions. It sold off 11.5% based on closing prices over three days last week. Not Gold, nor Crude, nor the S&P 500 had such moves.


Sugar #11 (click to enlarge)

You didn’t hear about the move in sugar because a $49 move in gold sounds so dramatic and devastating. Gold lost 5.8% over the same approximate time frame – about half the loss in March Sugar #11 in percentage terms. Professionals speak of percentage moves, not $$$ moves. Media take notice.

Even the pure system traders don’t have an advantage when things get very volatile. They are getting chopped up in these markets and they have mechanized rules for entering, exiting, and position sizing – long or short! Volatility is a duress in the market that does not favor one side of the market over the other: it’s equally brutal to your capital regardless of market bias.

But how you interface with the market as either a system trader or discretionary trader is irrelevant. If you’re thinking about being a system trader or are one currently, you can systematize a rule to go to cash and sit out when certain criteria are hit, such as an increase in volatility or when your defined up- or down trend has vanished. If you’re a discretionary trader, go take a yoga class.

Trading is not the activity of buying and selling (or shorting and covering). It’s the full process from idea germination to the end result of gains or losses. If you feel compelled to take action, you might be trading for the action itself.

If you are someone who is charged with making profits, and you don’t see a good trade, you don’t have to trade. I’ve never seen a shortage of ideas over long periods of time. You’re not going to miss anything. Yes it’s painful to miss profitable opportunities, but it’s also a good trader to know that when there is enormous uncertainty in the marketplace, the risks may outweigh the rewards by a large ratio. Sit on your hands.


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