Don’t Take Big Trading Risks Right Now

The stock market has been on a hot bullish streak, tempting traders to take big trading risks. Don’t follow this lead, because it probably won’t end well.

The sharp runs higher we’ve been experiencing lately don’t last for very long. When will it end? Who knows. Nobody rings a bell at the top.

Will the next drop be a small dip or a bigger correction? We won’t know it immediately. But if you are taking too much risk and putting more capital on the line than you can afford to lose, you’ll feel the effects for a long time to come. You might even have to step to the sidelines for a while (or permanently).

This feels very logical, but there’s the problem: While the stock market is at new highs, it is working very hard to drag you into the game, especially if you’ve been on the sidelines.

I’ve written often about the Wall of Worry. It’s up now, and it means there are many traders and investors on the sidelines who are waiting for even better conditions – which often doesn’t happen. The market is not always (if ever) accommodating to what you want it to do.

Anyway, back to my point. If you’re actively trading:

Don’t take big trading risks right now

You’ve got a lot of wind at your back: The stock market is rising, volatility is low, breadth is good, new highs are being made daily, earnings are strong, and macro news events are not causing much grief.

Let’s keep it that way by practicing good risk management. It starts and ends with following your rules. It doesn’t matter how tempting it is to go a little bigger on a trade. Keep sizing your trades properly.

If you’re a technician like me, remain focused on chart patterns, technical indicators, and price action, no matter how strong the market is. It will do its best to seduce you into breaking your rules. Once you break a rule, you’ll have zero guidelines to bail you out when things go south.

Trust me – I know this all too well. I have broken my own rules and paid a dear price. However, I learned from them to make sure it does not happen again.

When the trend changes, cut your losses quickly. Sit on the sidelines for a bit if you need to. When a new trend is established (up or down), you’ll be positioned to score some big wins.