Our previous post discussed why fundamentals actually do matter to the short term technical trader. Today I want to discuss the subject of risk – specifically the general risk of all short term trading. What I mean is this. There is a certain risk that the market will move against your position. Further, the potential strength of that movement affects the level of risk as well.

Take the current market for the S&P futures for example. The market is trading near an all time high, which in my opinion increases the risk to the downside considerably. Further, the market is very nervous, so any sudden move – particularly to the downside – has a good chance of turning violent very quickly.

That is what I meant by having a strong bias to be short this market. I may take a long trade here and there – if the setup looks really good – but it will be a nervous entry and a position that I will not likely hold very long – nor will I tolerate much of a move against the long position.

Sooner or later this market is going to have a significant correction to the downside – and I would love to be aboard that train when it leaves the station.

That’s why I am usually trading the short side in this market. I often take small profits here and there, and then reenter on the short side again as quickly as I can – just to be in the market short whenever possible.

Violent market moves against a position can be very costly – with or without a stop in place. I always use a hard stop market order – I may get some slippage, but it is better than missing your limit exit and getting caught by a violent move that really takes the market down a lot.

The fundamental risk in the current market is both real and significant – particularly to the downside. Personally, I love this type of market, but I trade with great care – and you should do the same.


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