Think, Plan, Prepare
• WHEN MARKETS ZIG strongly one way, and then suddenly zag in theother direction, investors get hurt and traders sometimes freeze in a state of “analysis paralysis.” They make hasty decisions, and their tidy profits disappear. Of course, there’s no way to know if a reversal is merely a correction or something bigger. But big or small, inthe heat of things, the roller coaster just feels bad. You might even panic and sell all of your positions.
But that may not be the smartest move. How often have you exited your positions, only to see others simultaneously loading up on new ones? And what happens next? The market moves right back to where it was before the correction and continues on its original path. It’s happened time and time again.
As a trader, your primary responsibility should be to protect your positions. Always. Since it’s impossible to predict what the stock market will do, a logical plan of action would be to position yourself so you can profit from rallies and hang in there during corrections. Generally, bullish rallies are long and slow, whereas bearish ones tend to be short and quick. How can you profit from such a market? “How to Save a Bear in a Herd of Bulls” on page 16 discusses strategies to use if you’re a bear in a bull market. These strategies help you take profits when you need to. But there’s a catch—you have to do it before the market takes those profits away. Otherwise, you might get trampled by the bulls.
It’s been said that fear and greed drive our trading decisions, which are dictated by crowd action. This is all mapped out on a price chart, which is why it may be worth training your eye to detect price patterns that suggest when crowds are united and strong. “Five Chart Patterns for Momo Traders” on page 28 shows some common patterns that can help find where the action is. Not all patterns will work the way they are supposed to, but it never hurts to have more tools to help make entry and exit decisions.
So, when the markets make wild swings, it would be wise to remember why you got in the trade in the first place, don’t let your emotions get the best of you, and execute on your plan for when things go wrong.