Sit-Out Power: The Secret of Champion Traders

Written by on January 2, 2012 in Featured Articles, Investing, Stock Talk, your Money with 6 Comments

I admit that I’m a fair weather blogger. When the Stock Market is rocking the ideas roll on my pages effortlessly, however when the market is “slapping me around” there are always other things to do. Typically fair weather fans or fair weather anything aren’t held in high-esteem. You are either with us or against us. That being said, my goal for 2012 is to trade just like I blog.  My goal is to be a fair weather trader.

For years I have proven to myself, that if the market is in an uptrend I can significantly out perform it.  If the market is up 10% – I will be up at least 20-30%.  I believe that my engineering background steers me into strong stocks with high growth profiles.  Conversely, when the market is in a correction I sometimes take it on the chin.  Simple reasoning would have me only trading during the uptrends and stepping aside during the corrections.  Those thoughts would come and go over the years, but it never moved beyond a thought.  I was firmly in the “there’s always a  bull market somewhere” camp.  When the market moved into correction, I sought out the stocks that were bucking the trend. There were also the occasional shorts.

To a certain degree this flaw was hidden due to the fact that I was trading part-time.   My 9 to 5 paid the bills and my trading account was “play” money.  It had no impact on my day to day living.  That all changed when I began trading full-time in 2006.  Trying to grind it out during the corrections of ’08 and ’11 were not only fruitless, but stressful to boot.

I began re-thinking my strategy when I attended Mark Minervini’s seminar in 2010.  I wrote about my experience here.  I remember that seminar being like drinking from a fire hose.  The information was coming so fast and furiously.  I actually attended the seminar again in ’11.  It’s amazing how many of the finer points I was able to pick up on the second  time around.

In both seminars, Mark made the statement that  making money in the market should be easy.  If it is not either one of two things can be wrong.  Either your selection criteria is faulty or the market is flawed.  This time instead of immediately jumping to the conclusion that if I am struggling the market must be flawed.  I thought what if my selection criteria is good in a good market, but faulty in a flawed market?  Now you are in for a world of hurt.  The crazy notion that  ”there’s always a bull market somewhere” can lead to this scenario.   Fortunately, there is a simple solution to this problem.  Mark calls it sit-out power.  Instead of trading against the trend or shorting simply go to cash and wait out the storm.  In other words, sometimes it is better to do nothing.

Mark didn’t use this analogy, but I immediately thought about Muhammad Ali’s rope-a-dope strategy.

George Foreman was the undefeated Heavyweight Champion of the World and had destroyed all comers.  He was a large imposing figure and was an overwhelming favorite to retain this crown.  Ali knew that going toe to toe with Foreman for 15 rounds would be fruitless.  So, he effectively “sat-out” the first seven rounds while Foreman threw his best punches.  When Foreman grew weary and Ali believed that he had an edge he attacked and knocked out Foreman to regain his heavyweight title.

If you study some of the greatest traders in history – you will find that many of them practiced “sit-out” power.  Jesse Livermore “There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time.”  I’m not 100% sure if this quote is attributable to William O’Neil, but its from his newspaper, Investors Business Daily, “Consistently successful investors don’t take risks when the deck is stacked against them. For aggressive investors, doing nothing is hard. But the impulse to try to outsmart a difficult market is what turns a potentially consistent winner into a boom-and-bust investor.”

Looking over my trades from 2011 having a little sit-power would have made a significant difference. Obviously, the key is identifying the proper times to sit-out.  Investors Business Daily can help with this task.  Each day, they make a call on whether the market is in a Uptrend, Under Pressure or in Correction.  When the Market shifts to Correction it is time to sit on your hands.  There are many other services that provide similar calls.

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  • Taz

    Nice read!

  • Anonymous

    I like that, either selection criteria is faulty or the market is flawed. 
    good stuff, learning to sit out myself.

  • Finance Trends

    Very useful post, thank you Michael.

  • zog

    Useless post. In 28 years of trading there are no market timers. none of the manny I have followed were correct on any consistence basis. Check timer track who follow hundreds of traders and services.  you can’t find one who is consistent over any long term period.

    you either have a system that works for you or you don’t. The ones who have working systems you never hear from or about.

  • TrendRida

    Why are the know it all commenters always anonymous? 

  • Sanjay

    Trading is not a game of perfectionist. No one can be a perfect timer always all the time.
    We need to give space and have to make our system considering that we are not super timers.