Believe it or not, I spend most of my days “doing nothing”. Yes, there’s a lot to do for RatioTrading (meetings, business calls, etc) and I am always managing my trades accordingly, but in all reality, I really do spend a lot of my time doing nothing.

By doing nothing, I mean not trading. And by not trading, I mean sitting on my hands. I heard a quote a long time ago that really stuck with me:

You don’t get smarter once you’re in a trade

I agree with that. In fact, I think not trading is as important as trading.  One of the common misconceptions that a lot of traders have is that they think they more they trade, the greater chance they have of making money. They feel that there must be something going on at times.  Long periods of doing nothing is almost considered useless by today’s hyperactive traders, who are in love with checking stock quotes every minute. We live in a get-rich-quick era where traders and investors are afraid they are going to miss something. Traders are obsessed about analysis about what the markets have done or are going to be doing – even if it has no connection to their trading decisions.

So what does doing nothing mean? We discuss this a lot in the trading room while we are watching the markets everyday. The idea is simple. We know what to do, we know exactly where our entries, stops, targets are going before even getting in. If what we are looking for isn’t there, we aren’t doing anything.

The common phrase we use is:

If there’s nothing going on, there’s nothing to do.

Staying patient and doing nothing is the key to successful trading. You may not believe it, but did you know that most successful poker players are usually the ones that bet the least amount of hands? A lot of the same things apply in trading the markets. Waiting and being patient is by far the most important thing and for most of us, maybe the most difficult. It’s no wonder that 95% of traders fail. Lack of patience usually has something to do with it. That and the fact that they have no trading plan.

So, there you have it, if you want to put yourself in a greater position to be a consistently profitable trader, do nothing. When a setup that is according to your trading plan occurs, you take it without hesitation. When it’s not there, sit on your hands, play a game, read a book, do something as long as it’s not trading. You’ll be surprised to find out sooner or later how easy and relaxing trading can be.

The last week has been interesting to say the least in the indices, especially the S&P 500.  The bulls and bears continue to fight back and forth between 1050 and around 1100 as we head into the end of May.  As mentioned before, the monthly close is going to be very important, and we believe it will dictate the entire summer, maybe the rest of the year.

If you look at the chart, you’ll notice that so far the S&P 500 has NOT closed below 1050 in a while. We believe that it’s a key level that will determine whether the bulls keep this  up-trend alive or whether they throw in the towel. What’s interesting is even if the market does break above 1100, it really doesn’t necessarily mean that we’re going to retest to the highs. In fact, order to convince me that the market is going to retest the highs, it’s going to have to break and close above 1172. Can it happen? Absolutely. We’re not here to tell you or guarantee you that the indices are going lower. We are just looking at the charts, and right now the charts are telling us to watch, wait, and most importantly, be patient.

A lot of traders and investors seem to be surprised by the recent selling that we’ve been seeing in these markets.  It’s something we’ve been paying close attention to for a while. In fact, it’s something we called a few months back as we waited with patience for the markets to continue their rally up into this zone.  “Zone? what are you talking about?” We talk about this all the time and many of you have probably heard of it. We refer to it as the “pullback zone”.

If you don’t know by now, we are Fibonacci traders over here; we look at the markets purely from a Fibonacci perspective which we know works very well and very accurate in the markets; all markets in fact. What we also know is when a market makes an impulse move and then retraces to the 50% to 61.8% (what you’ve seen the market do from late 2007 till now) it usually (about 65%) has a difficult time getting through that level and pulls back.  We are at that level right now. What we don’t know, at least not yet, is are we pulling back or are we selling off?  There’s a big difference. You see, if this is just a pullback, then eventually we’re just going to go higher. However, if this is a sell-off, then watch out. This could be the start of what may end up being the carnage that some people have been talking about.

Many investors and traders have been arguing back and forth about how the economy is either recovering or that there are so many problems that this 18 month rally has been nothing but a “dead cat bounce”.  We do have a serious unemployment problem, a housing crisis that isn’t really getting better, and let’s not get started on debt. On the flip side, you do have some indications that things are getting better or at least not so bad.

In the end the market and its participants will decide where we are going. I continue to stay short and watch this pullback very carefully. Don’t get me wrong, I don’t want to see the US economy go through what I think it may go through, but hey, if it’s going to happen anyways, why not make a few bucks?