Trading Lesson- Don’t Ignore the Major Markets
I have touched on this subject in some previous posts but it is so important for traders to look at the charts of the major indexes EVERY SINGLE DAY so look for early indications of a change of trend.
The majority of stocks will follow the market and trying to buy stocks breaking out when the market is rolling over is a sure way to lose money. Yes, some stocks might buck the trend of the market and outperform but most experienced traders know that it is OK to sit on the sidelines sometimes when the market is indecisive.
The stock market in early 2010 is a great example of how important it is to watch the major indexes and look at the volume and market internals. The market was showing major distribution days(high volume down days in mid-january) which most traders saw before the indexes broke their 50day moving averages.
Now depending on your trading strategy most trend traders would have been taking profits and at least closing out lagging positions and doing partial sells when those initial distribution days were showing in the major indexes, especially after such a massive rally that we have seen. But those that ignored the warning signs and just looked at their individual stocks instead of the market missed those signals, and when individual stocks are sitting on big gains like we have seen they can see very large selloffs from profit taking.
Sure some stocks might hold up intitially when a market starts breaking down but more times than not they will also follow the trend and stocks will fall a lot faster than they rise…….so don’t be caught holding onto stocks because you “like the story” or the “valuation is cheap now”,etc……if you bought the stocks with a defined plan and it went through your stop loss limits then sell them…….Sure it sucks to have a winner turn into a loser but when stocks are sitting on big gains they can roll over very fast.
If you don’t know how to interpret the market indexes for warning signs then get some good introductory books like William Oneills’s (founder of Investor Business Daily newspaper) or Stan Weinstein ………Even experienced traders re-read those books
For example the strong down volume days we saw with the weaker low volume days up that we saw earlier this week(Feb1-3) were major warning signs that people weren’t accumulating stocks after the selloff and yesterday’s big down day(Feb 4, 2010) wasn’t exactly a surprise.
Be cautious in this environment and if you are missed the signals don’t be caught holding onto losers…..