Trading Environments

By: Jea Yu

The following is an excerpt from Jea Yu's Trading Full Circle

If one understands simple cause and effect, the goal is to avoid the cause.  If you know that driving into a bad neighborhood at night might lead to getting car jacked, what do you do?  You avoid going into that neighborhood at night.  You keep going straight and don’t take a detour.  Sounds simple right?  It should be, but sometimes it’s not.

The market’s trading environment is a primary element to success.  This refutes the old beliefs that trading method and management alone are the keys to success.  I have seen weak traders make more money in a fertile environment than strong traders in an infertile environment.  When I refer to a fertile or infertile environment, I am not referring to an up or down market.  I am referring to the trading environment.

A fertile environment has follow-through, liquidity, stock and sector synergy, momentum, and most importantly, an effective foreshadowing element.  An infertile environment is the opposite.  It is choppy, usually flat, and illiquid.  A fertile environment can turn infertile in minutes.  Luckily, when there is the most chaos and panic is when a fertile environment is created.  This is usually found in the pre-market and the first hour of the market open.  Once things settle down, the fertility is usually the first to go, as everyone is trying to leapfrog each other using every edge, resulting in coin-toss setups.

Oscillation players may win for a while as the breakout players get chopped.  Once the oscillation players let their guards down, they take the average ordinary looking wiggle and jam it into an extended squeeze, sucking in breakout players and squeezing out the oscillation players.  Once the breakout players are comfortable, they pull a continuation to suck back in the oscillation players, and so forth.

Understand that a 50/50 chance is called a gamble.  Even 60/40 chances are considered gambler’s odds.  Speculation usually requires 80/20 chances of success.  This is what differentiates an infertile environment from a fertile environment – the inclusion of a foreshadowing setup.

Trading is a physical game.  This isn’t referring to the punching of walls, smashing of keyboards, and kicking of monitors across the room.  It means that just watching a choppy, flat market is enough to suck you back into the market.  The only way to avoid going into that rough neighborhood is to physically cut the connection.  That means get up and walk away when the environment is infertile.

It is so important to understand that everything you see on the screens during the market day will affect your judgment and frame of reference.  In fact, I believe your mindset has a sharpness gauge.  The more you watch a market, the further you deplete your sharpness.  Just as with a sword, the more you use it, the duller the blade becomes.  It needs to be sharpened.  Your mindset is the same.  People don’t realize that making a trade is not using the weapon – the weapon is used every time a trader looks at the screen or listens to CNBC.  Therefore, it is best to keep that focus only during fertile market environments, and replenish the gauge by taking physical breaks away from the screens during infertile environments.  A dead-zone break (from 12:00 PM to 2:00 PM EST) is implemented daily in the pit and has helped to prevent many unforced errors and blow-ups.

Why be a tiny goldfish in an ocean when you can be a big fish in a little pond?  This goes back to everything Sun Tzu wrote about in The Art of War.  It’s not about having a war of attrition and foolishly attacking a larger army; it’s about neutralizing the odds so that the victory is all but sealed when the real battle engages.  It’s about environment and placing yourself in the most favorable position as it pertains to victory.