You’ve heard me talk about things such as index futures and implied volatility when I’m offering perspective on what can get the market so jumpy from time to time. The following from John J. Murphy’s classic Technical Analysis of the Financial Markets tells us why stock prices can move, violently at times, against underlying trends, and against our long-term positioning, without it remotely meaning that we’re — in the long-run — on the wrong side of the market. I.e., futures traders do not enjoy the luxury of patience, and, thus, their reactions to price movements can actually exacerbate the extent of those movements:
Because of the high leverage factor in the futures markets, timing is especially crucial in that arena. It is quite possible to be correct on the general trend of the market and still lose money. Because margin requirements are so low in futures trading (usually less than 10%), a relatively small price move in the wrong direction can force the trader out of the market with the resulting loss of all or most of that margin.
A “buy and hold” strategy doesn’t apply to the futures arena.