This Week’s Battle Plan
March 2002, Just As The Market
Makes New Highs For The Year…
A new bull market for stocks has begun.
Ned Davis, Ned Davis Research
The recession is behind us.
Howard Kornblue, Managing Director, ING Funds
We’re a buyer on dips right now.
Christopher Bilman, Chief Investment Officer, $100 Billion
California Teachers Retirement Plans
Today’s reports paint a picture of an economy in the initial stages of a
recovery with legs.
Robert Goodman, Senior Advisor, Putnam Funds
The economy is going to come back more quickly than most people think.
Alan Alpers, $4 Billion Navellier & Associates
There’s now a fear of being left out of a rally by a lot of money managers.
Forrest Mervine, $1.1 billion Philadelphia Corp.
90 days later (today) the Dow is 1000 points lower.
Friday Morning’s Sentiment, Just After The
150-Point Down Opening (and before the rally)…
When I heard the Intel news, I threw in the towel in this market.
Jack Ablin, Chief Investment Officer $37 billion Harris
Trust
I can’t think of 25 stocks in the entire United States I’d like to buy right now.
Anais Faras, Equity Strategist, Nomura Investments
The negative sentiment is just very, very high right
now.
John O’Donoghue, Co-Head of Listed
Trading, Credit Suisse, First Boston
We could get a real bloodbath.
Al Goldman, Chief Market Strategist, AG Edwards
BUY THE FEAR, SELL THE GREED. It’s the biggest edge you will ever have.
This Week
Friday’s rally off the open was a good sign.
But we
obviously are still very, very oversold. We still have a number of buy signals
for early in the week, and the bias is higher. I’m long the futures and SPDRs
from Friday’s open. I’ll have my protective stops in Monday and will let price
take me out. This means (unless something crazy happens overnight), my profits
will be locked in, if and when prices come down. I have no idea if that is
Monday morning, or Thursday afternoon. Price over-rules my opinion.
A few weeks
back, we discussed Philosophy, Strategy and Money Management as the cornerstone
of your trading. The philosophy for me is to buy the fear and sell the greed.
The strategy I use to identify these times is my CVR
signals, News Reversals and my S&P, SOX, NDX and XBD
Market Reversal Strategies. From there (and where we are at today) it comes
down to it simply being a money management game. I don’t know if this trade will
be a small gain, average gain, or big gain. All I know is that there was fear
all over the place Friday morning, my indicators gave me buy signals, and my
stops were in, in case I was wrong. Trading can be made to be very difficult.
Or, it can be made very simple. Simple is better.
The Art of the Trade – Part 1
Over the next few weeks I’m going to cover some of the many advanced aspects of
real-world trading. We’ll look at stacking odds in your favor, whether or not to
trade ahead of news events, how to properly apply trailing stops to various
market conditions, which methodologies have the biggest edge, and much more.
This week, let’s look at what you should do if you are stopped out and the
market then reverses in the direction of your original entry.
Re-Entering a Trade
One of the hardest things to do is to re-enter a trade after you’ve been stopped
out. But, these are usually the highest percentage trades you will find. Let’s
walk through an example. You go long the SPDRs at 103 because you have a
strategy that is giving you a strong buy signal at these levels. Your parameters
(written rules) say you should risk 1 point and you place a protective stop at
102.
The market sells off and you are stopped out for a
1-point loss. Now what
should you do? Most people walk away angry and go look for something else to
trade (most people were also selling on the opening Friday morning). THIS IS
USUALLY NOT THE CORRECT THING TO DO! If your signals/strategies are still
valid, you should be re-entering at 103 if the market reverses back. Usually,
this second move is a higher percentage move and the odds of success are usually
higher. Now the question becomes "What if the market reverses back to 103 but my
signal is no longer valid?" Simple…no trade. You’ll only re-enter if the
signal remains valid and you will again place your protective stop at 102.
And now, let’s take this one step further. If the market drops to 100 (after you
were originally stopped out at 102) do you wait until it hits 103 to re-enter?
Likely not. If the signal is still valid, you can do better. If the signal is
still valid, you’ll re-enter in the 101 range. What you are doing here is letting
price get you back in. When the market hits 100 it may appear cheap, but you have
no idea if it’s on its way to 95. By waiting for prices to begin to rally off
the lows, you’ll be entering at lower levels than your original trade and you
are allowing price (not an opinion), to get you in.
These types of situations occur every day. Most traders and investors and money
managers don’t have answers for them and they end up guessing or winging it.
This guessing is what gets them into trouble. Instead of being structured and
disciplined, they become reactionary creatures “throwing in the towel”
when a news event hits the screen. By having a set game plan in place, you will
put yourself in the position to not only be superior to these people, you will
be in the position to maximize your profit earning potential from the markets.
If you need any help in further understanding this, please email me at LConnors@tradingmarkets.com
Next week, I’m going to teach you which trading methods have the biggest edge.
My New Video
About a month ago, I spent two days in a studio shooting a video that teaches
you how to “buy the fear and sell the greed.” Included are my
strategies to be on the same side as the specialists and nine strategies that
have never been made public before. What made the video so interesting was that
on the first day of the shoot, we had an avalanche of buy signals from the
strategies and techniques taught. The next day the market exploded over 300
points higher and the Nasdaq rose over 100 points. These type of moves are great
(and obviously profitable) when they occur, and if you watch the video it gives
you a chance to see it being taped on the day of such a move. If you would like
to order the video or read the details, click
here.
Congratulations!
Congratulations to Dave and Debbie Floyd on the birth of their first child (a
boy) last week. When I heard the news, I sent Dave an e-mail to congratulate
him. I told him to let the baby rest a few days before teaching him “how to
hit bids.” When you spend all of your adult life in this industry (as many
traders on this site have), you certainly suspect that your kids will too and
you want to make sure they are given the same knowledge you have. But, babies
are babies, and it’s good to give them a few days before the training begins.
Dave’s response was “hitting bids is next week’s lesson. I just finished
teaching him how to analyze price action.”
Well, you might think Dave is a bit obsessed and a bit too extreme in training
his son. But, he’s actually behind schedule versus another TM contributor. Rumor
has it that 30 years ago when Mary Jane Haggerty was pregnant, Kevin didn’t wait
for the kids to be born. He simply repeatedly barked into Mary Jane’s stomach Trade
what is, not what should be! Price precedes news! But the best trading advice
that he gave his children before they were born was, I may be the future head
of trading for Fidelity Capital Markets, but Connors taught me everything I
know. And don’t you ever forget that!
Have a great week trading (and give Jack his towel back when we’re 500 points
higher)!
Larry
Connors and Brice Wightman
Larry Connors is CEO and
co-founder of TradingMarkets. He is also the author of four books on trading,
including “Street
Smarts,” co-written with Linda Raschke, “Connors
on Advanced Trading Strategies“, and his latest release, “Trading
Connors VIX Reversals.“
Brice Wightman is a
Market Analyst at TradingMarkets.com.