Take the song, “Walk Like An Egyp-tian” and Replace it with “Trade Like An Idi-ot”, and you have a theme song that can serve you well in trading in the stock market. The run that we have seen in the market as of late is no different, and such a phrase is very useful.
One of my biggest flaws as a trader, is that I try to anticipate future counter-trend moves and try to get ahead of it so when the counter-trend does come to fruition, that I am able to maximize my gains. While I have been successful at this strategy in the past, most of the times it winds up costing me.
So in trends like we are seeing over the last 6 months, the best way to capitalize on them, is to keep trading with the trend, even if it defies logic as to why you would want to get in at the perceived tale-end of a market rally. The reason being, is that bull markets (the opposite is true for bear markets) rise higher then you would ever expect, and can keep propelling forward beyond any contrived rationale or understanding and frankly, when markets get this way, stochastics and other overbought/oversold indicators matter little.
What typically costs traders the most money in these types of markets, is applying logic to their trading decisions. When the market gets euphoric, like it is currently, you have to continue to trade with the trend (something I’m not exactly doing at the moment with my short positions in LSI, BBT, and UNH), until there is substantial evidence that the market’s sentiment has changed to bearish, or at least a sideways market.
Now those who represent the “dumb-money” (i.e. traders and investors who do little to educate themselves on the markets, and trade solely on emotions or hysteria) always get burned by trading like an idiot, so what am I advocating that is any different then what they are doing? Simple – I employ risk strategies, namely stop-losses. When trends end and reverses course, the stop-loss is your best friend, and mine too. While the dumb-money is calculating how much money they are likely to make if it goes up to “X” dollar amount, we are focused on preserving profits that are in hand, and managing even more so, our losing positions. So when the markets do turn, against the prevailing trend (and it always happens), the dumb-money loses everything, claims the market is rigged, and tries to find some class-action lawsuit forming on a message board to become a part of, while the smart-money, gets out, not at the top, but pretty close to it, with a solid profit in-hand, and then turns around and commits the new-found capital towards positions on the new trend in place.
So in this type of market that is screaming SHORT-SHORT-SHORT (didn’t use the word “Sell” in fear of coming off too Cramerish) patience is the key, you can initiate short positions to test the waters (like I did initially with LSI and then again with UNH and BBT), but don’t go 100% Short or into margin on a bunch of Ultra-Short ETF’s in hopes of calling the top and retiring early. You’ll crash and burn and get taken to the woodshed if you do.
Off-Topic: I’m working on tailoring my risk-reward swing-trade spreadsheet, that I use for my swing-trades so that you can also benefit from the exact calculations that I use when staging my positions and managing my risk, so stay tuned for that.