Trust your gut.
If you've been trading stocks long enough your intuition, that gnawing in the back of your mind, matters. We might refer to it as rolling with your instincts or trusting your gut, but what it is actually is experience.
I do believe in systems and strategies, so following only your instincts on trading decisions isn't something I would advocate 100% of the time. We still need to put in the time doing homework and research and studying where we've gone right and wrong with our recent decisions. This isn't an excuse to be lazy.
If you are new to trading and going off your gut, this has been a great market to employ that tactic. But it won't last. That's not to say you don't have good instincts, but it's more likely you have good luck. The market hates lucky traders.
The reason you would follow instinct, especially on an exit or moving into a conservative position, is to secure your emotional capital moving forward. A trader can easily become derailed by ignoring instinct, then get hurt from that inaction. You're likely to spend a few days or a few weeks (maybe longer) beating yourself up over ignoring your gut.
In short, the whole idea of following your gut is so you can sleep at night. This is in reference to taking a more conservative stance on your positions or exposure.
On the flip side, when you are assuming risk by following your gut, my approach is to stay on the smaller side of average. If your normal position size is $500, then go $250. If it's $10,000, then go $5,000. This is a good way to balance your desire to follow your gut without beating yourself up too much if you are wrong and veered outside your system.
With bonds hitting highs, gold hitting highs, equities hitting highs, cryptocurrency strong, and unknown names moving 100% in hours without cause, the gnawing in my gut has been on overdrive. Something's gotta give.
The Fed has been aggressive with equity, but this appears beyond that. The extra $600 in unemployment benefits plus some $1,200 stimulus checks may have created a bevy of new traders, but I've never seen $600 go that far since surviving on tap water and ramen in college.
After sleeping on the ideas around my article and decision from Monday to focus more on cash, conversation plays, and defined risk, I wanted to take the time to understand why -- and a way that explains it. I appreciate the emails and hope this covers it!
Until something does change in the charts, my trades will still be probing for more upside. I simply won't be overly aggressive about it and I'll be quick to manage risk and grab profits.
That's my approach for now and I'm sticking to it.
Tim Collins provides options trade ideas each day on Real Money Pro, our sister site for active traders. Click here to learn more and get great columns, commentary and trade ideas from Tim Collins, Mark Sebastian, Paul Price, Doug Kass, and others.