TradingMarkets Ten Traders’ Resolutions for 2009

Everybody makes resolutions for the New Year. Here are ten resolutions from TradingMarkets.com that can help make you a better, more confident and profitable trader this year.

1. Buy Above the 200-day Moving Average, Sell Below

One of the cornerstones of our research into short term stock behavior since 1995 is the fact that stocks that are under their 200-day moving average perform very differently over time than stocks that are above their 200-day moving averages.

Stocks above the 200-day moving average tend to rally after becoming oversold, often moving to new highs in the short term. By contrast, stocks below the 200-day moving average tend to underperform, with weak rallies and pullbacks that lead often to lower lows rather than meaningful oversold bounces.

In 2009, resolve to only buy stocks and ETFs that are trading above their 200-day moving averages.

Reading: The 200-Day Moving Average and the Most Important Rule in Swing Trading by David Penn

2. Buy Pullbacks Not Breakouts

While buying breakouts tend to be more exciting for the average short term trader, our research suggests that buying pullbacks is likely to be more profitable.

This goes against the grain of many short term traders, who like to see stocks already moving higher before they feel comfortable taking a position. Our research, however, suggests that in the short term, stocks do better after making short term lows than they do after making short term highs. As such, we prefer the traditional, time-tested strategy of buying low and selling high, to the notion of buying high and selling higher – at least when it comes to short term trading in stocks and ETFs.

This year, try buying good stocks when they go on sale, rather than when they are already moving higher and making new highs.

Reading: If A Stock Drops 5 Days in a Row, Should You Buy It? by Larry Connors

3. The 2-Period RSI Is My Shepherd

For short term traders looking to take advantage of temporarily exuberance or despair in stocks and ETFs, there may be no more effective tool than the 2-period RSI.

Based on Welles Wilder’s classic Relative Strength Index, we have found that by shortening the standard duration on the RSI from 14-periods to 2, we uncover one of the most effective ways of determining whether a stock or exchange-traded fund is overbought and a possible sell, or oversold and a possible buy. We like the 2-period RSI so much that it is a factor in many of successful trading strategies we use everyday for both stocks and ETFs.

In fact, Larry’s latest book contains a number of straightforward, easy-to-understand, short term trading strategies specifically using the 2-period RSI. Click here to find out more about SHORT TERM TRADING STRATEGIES THAT WORK.

4. Short Term PowerRatings Work

If you trade stocks or ETFs in the short term, our Short Term PowerRatings can provide a powerful edge in spotting the stocks or funds most likely to outperform the average stock in the near term.

Our highest rated Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days. And our PowerRatings aren’t just for stocks. In 2008, we were able to show traders how inverse ETFs with high Short Term PowerRatings could be a valuable addition to their short term trading strategy.

Try a free, 7-day subscription to our Short Term PowerRatings and see if they help give you the edge you need in picking stocks and ETFs that are poised to move higher!

6. The VIX Works

The VIX or CBOE Volatility index has gotten a tough rap lately. We think that’s completely unjustified. For traders who know how to accurately use the VIX, it is an excellent source of market intelligence that every short term trader of stocks, ETFs and options can use.

Larry Connors discovered years ago that static levels are not what are important when it comes to reading the VIX. Instead, he showed that a dynamic approach to the VIX, focused on when the VIX is stretched above or below its 10-day moving average can help short term traders spot when stocks are likely to surprise to the upside and when stocks are more likely to underperform.

So stop worrying and learn to love the VIX! As we wrote in TradingMarkets 10 Trading Rules #5 – Use the VIX – It Works!

6. Seek Knowledge

More than a few of the successful traders I have interviewed as part of our Big Saturday Interview series have emphasized adaptability as one of the most important characteristics for a winning trader to have. Market conditions change – from low volatility environments to high volatility markets, from the trending to the range-bound. Being aware of different ways to modify your current trading strategy to deal with new challenges is key to being a successful trader year after year.

One way to stay on top of new thoughts and discoveries for short term traders is by regularly reading TradingMarkets.com. And of course books like SHORT TERM TRADING STRATEGIES THAT WORK, should be a part of your trading library. But an even more professional approach is to seek out opportunities like our Swing Trading College, a 15-week course taught by Larry Connors that covers everything you need to know about trading stocks, ETFs, options, e-minis and futures on a short term basis. Each College builds upon the lessons and experiences of the last, making it an always fresh, always relevant curriculum for those looking to trade today’s markets.

Click here to learn about the TradingMarkets Swing Trading College!

7. Learn to Trade ETFs

According to one report, eight out of every ten securities traded is an exchange-traded fund. Were ETFs a part of your trading strategy in 2008? Maybe they should be in 2009.

The advantages that ETFs provide short term traders are staggering. ETF trading allows traders to avoid corporate or single stock risk. ETFs make it possible for traders to hedge stock positions, make speculative bets with less capital through leveraged ETFs, and bet against the market by way of short or inverse ETFs. The rising popularity of ETF trading has also spawned a number of new trading techniques for ETF traders (by the way, you can find many of these strategies, such as the Double 7s strategy, in Larry’s new book!)

If you didn’t trade ETFs in 2008, consider making 2009 the year when you fly the increasingly friendly ETF skies. One way to keep up on the world of ETFs is through our daily TradingMarkets 7 ETFs You Need to Know column – also available as an e-mail newsletter. Click here to subscribe.

8. Learn How Not to Read the News

Traders of stocks and ETFs must bewary of the herd mentality that is often no more effectively transmitted than through the mainstream financial media.

Think back to the classic “Death of Equities” Business Week cover from 1979. Remember the euphoria of late 1999 or the fall of 2007 when CNBC was cheering the arrival of new, all-time highs in the S&P 500 and Dow and Fox Business Channel was launched.

If you choose a sound trading strategy, then that strategy will provide you with all the “news” you need to know. If you have to have the CBNC, Fox Business or Bloomberg TV on, try keeping it on mute most of the time. Your nerves – and your trading portfolio – will thank you.

9. Never Bet Your Lifestyle

In our Big Saturday Interviews, legendary trader Larry Williams said that it was his approach to “win big by trading small”. The temptation to use leverage to increase potential gains is at the root of the majority of fund collapses and trader blowups – from Long Term Capital Management to the financial scandals of 2007.

I remember reading the phrase “never get your lifestyle” in an interview in the book, Market Wizards. It’s an excellent motto for traders when the temptation to go “all in” on a sure-fire trade begins to become all-too-tempting.

Resolve in 2009 to trade within your means and not to become too greedy or impatient. Give you and your trading strategy time to be as successful as it can be.

10. To Thine Self Be True

Many of us are attracted to the world of trading because it is world were we can rise or fall on our merits. It is little surprise that traders have often felt synonymous with some of our culture’s greatest “can-do” archetypes: the indefatigable detective, the gambler with nerves of steel …

In the same way that we demand transparency in the markets we trade, we also need to make sure we are transparent to ourselves. Are we following the rules we set out for ourselves as traders? Are we making excuses for our under performance – or working patiently and diligently to correct our mistakes? Do we tend to get “too high” when times are good – often setting ourselves up for a lapse in discipline and potential losses down the line?

One of the best discoveries I made in 2008 was the trading blog of Don Miller, professional traders and contributor to TradingMarkets.com. Don’s blog is a chronicle not only of the trades he makes in the S&P 500 e-mini market every day. Don also provides an insight to what it feels like to be a professional trader: the wins, the losses, the setbacks and the triumphs. It is an excellent read and a nice reminder that the trader who is most honest with him or herself and performance is often the trader best prepared to come out on top year after year. If you haven’t read Don’s blog, consider bookmarking it and making it one of your regular visits.

I hope these Ten Trading Resolutions for 2009 provide some ideas of what you can do to help you be an even better trader in 2009. Be sure that TradingMarkets will be with you every day and every step of the way with some of the best commentary, analysis and trading solutions available anywhere.

Have a Great Trading Year!

David Penn is Editor in Chief at TradingMarkets