Monday, July 11, 2011

Don't Fight the Trend: A Lesson

When I first started trading, I had tunnel vision. I took what I learned about indicators and applied them one chart at a time.  And while I had become fairly competent at charting, nothing ever worked out quite like I expected. I got caught in a frustrating loop: I’d see a setup and take it expecting a big move, but would only get a small one. I wouldn’t get out in time, and I’d end up stopping out. Not wanting to get burned the next time, I’d see a setup and take the first bump I got, only to see the stock continue to rise along with all the profits I wasn’t making.

Fortunately, money management kept me from losing big, but I also wasn’t making big. My technical analysis was missing a key component--I wasn’t paying attention to the overall market conditions.

If the markets are roaring, shorts are going to be more difficult to predict. If the markets are dropping, few stocks will buck the trend. That’s why now if I’m looking at an oil stock, you can bet that I’m also looking at crude oil, and the energy sectors in general. Or if a gold stock looks bullish but gold is in a down-trend, I’m going to think twice before going long.

Since I trade both Canadian and American stocks, my eyes are glued to the TSX 60 index, the S&P 500 and the US dollar at all times. I have to have as solid a grasp as possible on what is happening in all areas of the market before I make any move to make sure I'm not fighting a trend. had a nice bull flag setup but fell with the rest of the market

This is why I didn’t buy last week, despite its beautiful bull flag. What tipped me off was the fact that the TSX 60 index was incredibly extended and due for a pullback. This told me that going long any TSX listed stock would be like rowing a boat upstream--i.e., possible, but difficult and likely to fail.

So while this chart looked great by itself, it didn’t look great enough to fight the market, and sure enough it got a big pullback today along with everything else.

Overall, as a lesson for beginners, never stop paying attention to the underlying market conditions, because no stock trades in a vacuum. And if you see a chart with so many factors that you think it just might buck the trend, keep a tighter stop and expect a smaller move.

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