As a trader, I spend my day putting together clues on what the market is going to do next.
I look at countless charts and review data like economic releases for inflation and jobs, bonds, commodities, currencies, and company earnings.
Plus, I keep an eye on the prospect of interest rate moves from the Federal Reserve…
All of these factors have the potential to move the market. But it’s not always immediately clear how the market will react.
Plus, with algorithmic trading dominating daily volumes, sometimes you’ll see moves in stocks that just don’t make any sense.
And this is where discipline becomes key…
A big mistake traders make is thinking they’ve always got to be in the market. After all, you can’t make money sitting on the sidelines.
But trading is different from many other professions. Sometimes the best action is simply to take no action at all…
You can’t afford to fritter your capital away on low-probability trades. Unless you find a strong setup, it’s better to pass on a trade.
That trade setup might be based on indicators on a chart (momentum reversals, for example). Yet there is another layer to consider when it comes to trading options: volatility.
When you buy an option, the aim is to buy when volatility is low but rising. Rising volatility causes option premiums to rise too, adding a tailwind to your position.
On the other hand, if volatility is already high, it may be better to let that trade go, even if there’s an interesting setup. Even if you get the trade direction right, you run the risk of falling volatility eroding the value of the option.
It’s a similar situation when we sell options.
If we sell an option when volatility is low, it will reduce the premium we receive. So even if I get the trade direction right, rising volatility could mean I’ll buy the option back at a higher premium than I otherwise would have.
Understanding these aspects of volatility will be vital as we go into the new year…
Data this week showed a mixed bag in the jobs market. The unemployment rate for November rose to 4.6%. That was 0.2% higher than the previous print and consensus forecasts of 4.4%. What’s more, it’s the highest unemployment reading since September 2021.
And while nonfarm payrolls (NFP) data slightly beat expectations (64,000 versus 50,000 forecast), it came after October’s 105,000 loss.
A shaky jobs market is going to keep downward pressure on interest rates coming into 2026. And don’t forget that the White House is agitating for rates to fall further.
But here’s the catch… Mortgages and other key financial products are based on 10-year bond yields. So a fed funds rate cut doesn’t guarantee those rates will go down too.
And recall that when the Fed makes a series of rate cuts, they’ve often come too late. The Fed gets caught playing catch-up while the economy is already contracting. That never bodes well for stocks.
So volatility seems primed to pick up in the new year. The sugar hit of rate cuts will fade as the economy (and stocks) come under increasing pressure.
Disciplined traders need to watch carefully for the right moments to act amid these shifts.
Remember, you don’t always have to trade… If the market action doesn’t make any sense or the right setup doesn’t appear, then it’s best to just leave things alone.
Rest assured, there will be plenty of moments to trade in the year ahead. And I aim to help you find all the best ones.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
