Take profits when offered, here’s why…

  • May 19, 2006
  • Dave Landry

Smoke ’em If You Got ’em—Why Money Management Is Crucial In Oversold
Markets

Money and position management–the use of protective stops, profit taking,
and trailing stops–is crucial to your longer-term success as a trader. This is
especially true in oversold markets since they are prone to bounce. Let’s follow
up on recently mentioned  Tetra Technologies
(
TTI |
Quote |
Chart |
News |
PowerRating). Following
the rules outlined in my swing trade Primer (email me if you need a copy),
notice that the stock triggers an entry  (as a short) and then sells off to hit the profit
target. Partial profits could (and should) have been taken. The stop on the
remainder is then moved to breakeven. The stock then rallies to hit the stop on
those shares for a scratch. As you can see, profits can evaporate quickly in an
oversold market (combined with an oversold sector). 

Speaking of shorts, I know that a lot of  you do not play the short
side. If you want to make a career out of trading, you really need to learn how
to play both sides of the market. Let me know if you need an intro article on
the subject. 

On Friday,  the Nasdaq  worked its way lower
throughout  the morning. It found its low around mid-day and then began to
rally. It gave back some of those gains in late afternoon trading but was able
to finish the day on a high note. .  

The S&P put in a somewhat similar performance but was a little weaker.        

So what do we do?  Looking at the big blue arrows above, you can
see that the market has dropped precipitously. Duh! This action has the market
very oversold and due for a bounce.  However, this in and of itself isn’t
reason to buy. About the only way I would buy (index ETFs) for a trade 
would be the indices gapped sharply lower on Monday and then showed early signs
of reversing. For you non-trader types, this is know as an “opening gap
reversal” (btw, if you’ve never heard of them, you probably don’t want to
attempt this!).  No matter what you do, use caution in this in
environment:  Oversold markets create a damned if you do and damned if you
don’t situation: if you buy, oversold becomes even more oversold. If you short,
the market will bounce from oversold. 

No setups tonight, on a continued bounce, we will likely see a plethora of
shorts setting up.  

Best of luck with your trading on Monday! 

Dave Landry

dave@davelandry.com

P.S. Reminder: Protective stops on every trade!

P.P.S. If you would like a free
trial to my trading service, click
here.

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