Thursday, February 01, 2007

How to Win in a Sideway Trending Market

There is a conflicting story going on in the markets. One, we have overbought conditions in the market. The technicals show it, and the chart shows a similar picture. Like a plane taking off the ground, we have seen such incredible gains in the markets from August 06 to December 06. But looking at the price action in the last month and a half, we can easily see that momentum is just not there: The markets are fighting within a sideways trend, or struggling to hold highs.

So, who is actually winning in this market?

Unless you’re a day trader, possibly no one.

That is why it is absolutely essential to stick with your original trading plan. Keep flip-flopping trading strategies to follow the flip-flopping nature of the markets will only leave you with one possible outcome: an empty account.

Earnings season is the season of greed, because the shoulda-woulda-coulda types of people come out. I know, I’ve been there:

“I’ve been watching this stock for a week, and today it’s up 25%”
Then you dump in money to follow the short term greed, only to watch consolidation the next day…

There has to be a fine balance between a tactful plan, and following emotion. You don’t want the latter, and the former will make you wealthy in the long run.

Even though things may not be shaping up in the short term, a solid plan will keep you sane during those hair-pulling times.

The best way to remain true to your plan is simple:

Write it down.

Despite trading with the same plan for a while now, I still have my strategy written down, and in front of me at all times. That way when things start looking a little illogical, one can always return back to the central focus.

Write it down.

A sideways trend will test you, emotionally, and financially. A solid plan will keep everything in perspective.

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