EDGE TRADER

Monday, September 19, 2005

Downtime

While I am parked awaiting the Fed's rate decision, a discussion of safety is in order. My trading rules prevent me from buying and holding a new investment on a Friday, the day before a Fed decision, or the day before a significant market catalyst.

For example, August's PPI numbers were released right before the Fed meeting. So if they indicated continued inflation, the market was likely to react to the following week's Fed rate decision, as reality sets in that inflation is up, and hence the Fed will not pause or indicate a stop to the series of rate hikes. In that scenario, I would not trade 24 hours prior to the August PPI numbers. In a different market, the catalyst may have nothing at all to do with the Fed. In our current market, another catalyst has to do with whether there is a hurricane approaching the Gulf of Mexico or not... This is why most mechanical trading systems fail; they fail to encapsulate current market sentiment.

That having been said, those who tread where others fear to walk are generally rewarded with outsized returns! My trading does allow me to trade on these "taboo" scenarios - options expiration, overnight trades where the holding period is the last sixty seconds of a trading day and the first fifteen minutes of the next trading day, and stocks experiencing significant bad news. Generally, it is these scenarios that generate the best trading returns for me.

Why can I earn outsized returns in these scenarios? Because there are traders too afraid to touch them, resulting in greater "risk" premiums. In my trading rules, the selection of which stocks to trade in one of these so called "risky" scenarios is the key that keeps my trading percentages high.

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