Date: 1/27/2023
Author: Chris Hood
Are you a market contrarian?
What I mean by this is do you look at over-extended prices and assume that a stock is bound to reverse?
Many are and sometimes it works. However, it’s usually just a waste of money.
In the Trade Command room, we had a rather lively discussion on how these common biases can get you into trouble.
It’s such a common problem that I felt compelled to address it.
So here are a few key tips to help you out.
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There’s a common adage that goes “buy the dip and sell the rip.”
In other words, buy low and sell high. And this seems like a reasonable thing to do, and perhaps some do make money at this.
My problem with this is that it requires you to pick tops and bottoms.
And not even the best traders can do this.
Averaging down on a losing position is simply throwing good money at a bad idea. One of my trading heroes Paul Tudor Jones even said:
“Only losers average down.”
This billionare trader knows that stocks have a certain inertia about them. Those that have made a new high are much more likely to keep going up than a falling ticker is to rebound.
When stocks are stuck in a range it’s possible to make quick, in-and-out moves.
However, it’s impossible to know how far they’ll run when they break out to the upside or downside. So pick a stop loss and get out of your losing trades, don’t pile more cash onto a sinking ship.
I use my indicators to let me know whether the underlying momentum structure is bearish bullish or neutral.
That’s the basis of the Power Trend and Alpha Waves tools that I’ve built.
They give me the confidence to stay in a trade when price action looks a bit dicey, and the foresight to get out when I see a shift.
Price action alone doesn’t mean much.
It’s not where the price is that matters, it’s where it’s going – especially on directional plays like long calls and puts.
Managing your trades requires attention to your indicators. Whatever technical system you use, just make sure that you follow your plan.
If it hits your pre-defined stop then get out.
However, if your stop isn’t hit, focus on your indicators.
Just because the value of your position is down doesn’t necessarily mean you should exit the trade.
Great strategies are useless if you don’t trust them. If you aren’t going to follow a system that has a backtested track-record, then why are you trading?
I see far too many people fold early.
They take unnecessary losses because they operate on emotion rather than logic and probability.
Believe me, I was the same way when I was learning. Now I just defer to my tools and keep calm.
Do the same and watch your profits climb.
Cheers,
Chris Hood
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