Opening Position
February 2011
The broader markets have rallied since March 2009, but they are doing so on weak volume and weak economic fundamentals. Should this be a reason to stay out of the markets? When the markets seem overbought, it is wise to expect a big selloff any day. The markets of 2007–08 are too recent a memory to simply wipe away. Add to that all the talk about the possibility of a double-dip recession and the worst of housing foreclosures yet to come, and there’s all the more reason to treat each trading day with caution. When the markets pulled back in May 2010, there was enough reason to expect a reversal of the bullish trend. This pullback would have taken many out of the market, but its strength wasn’t enough to send people shorting the markets. The market resumed its uptrend in early September, pulled back slightly in November, and resumed with the usual Santa Claus rally we often see in December.
Any time I get overenthusiastic about the markets, I have found it useful to get back to the basics. That always seems to calm my jitters and makes everything clearer. The basic premise of trading is to determine which way the market is moving. And there are only three ways it can move: up, down, or sideways. Answering that question involves selecting one trend measuring indicator and applying it to a chart. This could be something as simple as a moving average. If the market is bullish, your trading bias will naturally be bullish. You would then turn to your list of strategies that work favorably during a bullish market. You’re not going to open short positions when prices are trending up, after all.
In this playing field of uncertainty, whether you trade equities, options, currencies, bonds, or futures, you need a method to assist you in making objective decisions so you can justify risking money on a trade. You are not going to put money into a trade unless you think it’s worth taking the risk. You need to always know what your risk/reward ratio is before making a trade. This is why it’s always a good idea to have a handful of trading strategies and systems you have faith in. The key is to keep this handful of trusty tactics up to date. Not only that, make sure it keeps up with the markets as they evolve, new ideas emerge, and new products enter the marketplace.
Jayanthi Gopalakrishnan, Editor