When I lecture, I always ask investors what positions there are in trading. Most respond, “Long” or “Short.” A few understand that being flat is also a position. But what most don’t realize is that being flat can actually make you the most amount of money. It’s the only way to view the market at face value.
I have never met anyone who was long and felt the market was going down, or short and thought the market was going up. If they had, I would have asked why they stayed in their position if they felt the market was going against them. In today’s new world of electronic trading, cheap money, additional algorithms and funds, market moves are much more drastic. That’s why, under certain circumstances, being flat can be the best position to be in.
These situations include:
1) Extreme market volatility – There are times it’s okay to walk away from the market and let it settle down. Not all markets are meant for all traders.
2) When a trade is going against you – Get flat, even if it just for a moment. You will find that it is much easier to see that you are wrong while on the sidelines, even if it just for a second. Your mind will clear as you assess the situation with new eyes.
3) You’re worried about getting out of a trade and the market going your way – DON’T agonize over this. It will happen and you can always get back in with in a few cents.
4) You’re not feeling the pain in a bad trade – Traders can often lose their sense of reality. It’s not just numbers; it’s real money.
5) You’re tired and not reacting well to market conditions.
6) You’re having a bad streak – Learn to get flat. Walk around for a few hours, even days, to understand that not losing money can be just as good as making money.
7) You’re under outside stressors and can’t focus.
8) You think the market is over bought and do not want to be short.
9) You think the market is over sold and do not want to get long.
10) There is too much of an emotional connection – If you aren’t sure about the direction of the market, being flat allows you to jump in without an emotional connection to a trade on the other side of the market.
All investors need to remember that they will never be right on all moves and that they will never be in all the major moves. However, there will always be chances in the future to get into a new trade.
Don’t worry if you’re not in a position that you’re making money, because you’re not losing it either. Take advantage of it. Whether you’ve been flat for a second or flat for a week, being able to think clearly and make objective trading and investing decisions will make you more money then any other position could.
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