Going into trading on Tuesday, the market is obviously extremely overbought: the ^QQQQ^ has a 2-period RSI of more than 99, and other equity index ETFs like the ^SPY^ and the ^IWM^ are in similarly extreme territory.
But I want to look at this from a larger perspective.
For mean reversion traders, it is sometimes difficult the 3-4 times a year when markets go on one-way runs as they are doing now.
In Larry Connors’ Daily Battle Plan, we are using a quantified trading model that has served us well for the past two years. It has allowed us to trade through the markets of 2008 and 2009. And as the markets are chopping around here in 2010, we know that eventually they will break away from the 200-day moving average. And should this move be a real move to the upside, we will have ample opportunity to enter the market on pullbacks above the 200-day as we move forward.
The key is to stick with the plan. Without a plan traders tend to end up jumping from strategy to strategy, chasing one strategy after the other in search of a Holy Grail. This is really not the most effective way to trade. In fact, after doing this for nearly 30 years, one of the key themes that I have seen in traders who have lost money in the markets – and probably in many cases no longer trade any more – is because they jumped from one strategy to the next and the next and the next …
I can tell you that the streets are paved with former traders who never had a concrete plan and aggregated losses from one method to another.
Instead what we have in the Daily Battle Plan is a concrete strategy and consistent approach to short term trading. This strategy is backed by statistics and has guided us well not just in the historical testing, but also in the real trading. And we want to just keep following that plan.
Sometimes it is difficult when markets are making these one-way runs. The key is to wait through them and ultimately climb on board the trend. In this case, should the trend be higher, we’ll wait for those pullbacks and take advantage of them as they occur.
Again, having one plan, backed by statistics, and having the understanding that markets will from time to time move in one direction after they cross the 200-day, is inherent in the way we trade, and is completely normal.
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.