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Today history will be made as the results of the banks' stress tests will be announced later this afternoon. The market has sprinted ahead of the release of the report and a good deal of this move is tied into heavy short-covering especially from the larger hedge funds. For your trading you have a decision to make and this is a decision that should be made tied into all economic report events (and this will be today's Trading Lesson of the Day).
If you trade hedged and protected, you're likely fine into any economic report. You paid for the insurance and the insurance should do its job (its what you paid for).
If you trade unhedged, you should decide ahead of time whether or not you're going to take positions into large economic reports, especially once-in-a-generation reports that will happen today.
Obviously the market is overbought and as we know, overbought will at times to lead to even more overbought. And if today's once-in-a-generation report has news that's better than what's already been rumored, than the market will likely run even further.
This is where you decide ahead of time "do I take my positions into news like this, or do I go into cash on news ahead of the news?" There is no one correct answer. I know of successful traders who take everything into all news and earnings announcements and I know of professional traders who go into all cash no matter what ahead of these reports. They key is to decide ahead of time which strategy you're going to follow and then be consistent with it. Jumping around leads to chaotic results and staying with one decision leads to smoother long term returns. I learned this many years ago from one of the traders featured in Market Wizards and it remains excellent advice.
Obviously we want trades to be profitable and I know everyone is realistic enough to know that a percentage of them will not be. The key is for more to trades to be successful and to have a positive P&L at the end of the year. Being consistent with decisions like the one that's ahead of you today makes you a better trader, especially over the long-term.
This is from Larry Connors Daily Battle Plan which he publishes each morning. If you'd like to take a free trial click here, or call 1-888-484-8220 ext 1 to start your free trial today.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.
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