“Trade what you see, not what you want to see”

When markets are trading at fresh highs there is no psychological resistance level; there’s no vested interest from days gone by; nobody saying, “that’s my break-even level, that’s where I’ll get out”.

If there was, we might have had trouble breaking above each and every round number along the way. Have we struggled so far?  Hardly.

Yes, there have been strong inflows into large cap stocks via ETFs, sending stocks higher and attracting even more ETF money. What follows is a rinse and repeat, and therefore we have no way of knowing what will happen when this cycle ends.

Yes, extreme monetary stimulus (negative rates, quantitative easing, etc) has propped up demand for risk assets. But again, how expensive has it been staying on the side-lines watching and waiting?

The suggestion it not that this is the top for the major indices. Nor that this rally will keep going for any given time duration or percentage.

Merely, the point is that saying just because something goes up a lot doesn’t mean that it has to come down imminently. Especially not because the quintessential market trader is hoping for it. If that were the case, investing/trading would be easy. For the record, it isn’t.

Whichever camp you are in, nobody forced you to call the top early. Nobody obliged you to support a losing position, hoping it’ll come back. Nobody made you hold off and sit on the side-lines.

“The trend is your friend, until the bend at the end”

The point of this observation is that next time we see such a phenomenon, rather than trying to beat the market and call the top, a trader should allow the trend to show you that it is indeed at or near the end.

After all, you can’t make it turn south by shouting at it and telling everyone it’s gone too far.

Not unless you have an unbelievably big sway on the markets and everybody takes what you say as Gospel, such as a big bank or fund manager.

Otherwise, it can be a rather expensive fight, both in terms of financial loss and/or lost opportunity.

 “What are my current options?”

What if we see the UK 100 push on to 8,000 or 9,000 soon? What if the Dow keeps pushing on to new records, reaching 24,000, 25,000 or even 26,000? Surely anything’s possible. After all, it only took 53 trading days for the Dow to gain 100 points to 23K.

In the event that the trend does continue, those not currently long have three distinct options:

1. Do nothing and wait for a sell-off
2. Trade as intended but with a smaller deal size
3. Go long but use a stop loss or guaranteed stop.

The first option here will leave you in no position to benefit from the current stock market strength and, if the rally shows no sign of letting up, sitting on the sidelines waiting an indefinite length of time for a sell-off.

At least by utilising options 2 or 3, if global equity markets keep continuing to fresh all-time highs, you’re not going to miss out, even if you do mitigate the potential risk you’re taking, although beware they may fall with the potential for losses.

For more information about how you can utilise stops to reduce the amount of risk in a trade, contact [email protected] or call 020 3051 7461.