Another One Question Interview, this time from Smita Sadana, the female trader I interviewed some time ago.

Reminder: feel free to submit your own answer and I’ll post it, too!

What trading lesson(s) have you learned from the downtrend that started in May?

Smita:

I had been anticipating this downtrend since March. Even though the indices had been making highs from January to March, there was a lot of underlying weakness as evident by narrowing stock leadership and non-confirmation by semiconductors and biotechs, both of which attract speculative money. However, the volatility and viciousness of the downtrend in such a short time was certainly unexpected. Market would seem to gap up and close at the highs, then gap down and close at the lows of the day. The frustrating lack of consistent follow through in either direction caused most traditional technical setups to fail.

I learned that in whipsawing markets, it is best to have reduced exposure to individual stocks and have positions in indices instead. After all, the indices are hanging close to unchanged, while most of the leading stocks are down considerably for the year. In turbulent times like this, it is advisable to have smaller than usual stock positions (if any) and have some portfolio in cash. When the fog starts clearing up, trading can be back on track with the usual position sizes.

Related posts:

1. Interview with Smita Sadana
2. One Question Interview with David Hannan
3. One Question Interview with Ugly
4. One Question Interview with Nusair Bawla
5. One Question Interview with Jeff White