One of the first trading rules, guidelines, habits, or principles I learned was to respect the trend of the market, and equally important, don’t fight the trend. Of course that introduced the challenge of what trend are we watching and how long should a trend be in place before it is a trend. I taught on this topic in a December webinar and the importance of defining the timeline of the trend you are using and putting that trendline into perspective as it relates to the strategy you use to trade within the trend. The chart below is a weekly chart of the S&P 500 index going back to the 2012 bottom or pivot point for the current long term trend.
The reason I am putting chart up is to show that the trendline is still positive. Despite all the volatility and talk about the market being in trouble, the trend is still in place. The point being sometimes we need to take a step back and look at things from different perspective. The short term day-to-day noise and activity can sometime take over what is really taking place in the markets longer term. Stop, evaluate, project and determine what you belief looking forward with all the facts not just those screaming the loudest currently.
The chart below is the daily chart of the S&P 500 index and it gives a different perspective as the market shows signs of breaking down short term. The best case is we are in a consolidation phase for the index and looking for a catalyst up or down short term. The negative sentiment and volatility index is building momentum from investors and only serves to raise concern short term. With that in mind, we would manage the short term view differently than the longer term view. We need to manage our risk on any short term trading positions and set exit points or stops at the risk levels that fit the position. Currently we are using 1972 as the absolute support point for any short term position and 1992 as a possible exit point if we fail to hold the bounce higher from last Friday.
If the short term breaks the key support levels the longer term trendline would come into play and prompt decisions of how to treat longer term positions should the downside accelerate based on key short term events. Here in lies the challenge of managing your positions relative to stops, targets and entry points each day. But, it can be done, you just have to put in the extra work to understand what the current story is in the market, what is driving the short term and the longer term views, are they sustainable or are they just a short term event impacting how the short term behaves. This requires discipline to read, research and understand the story behind the moves. It requires discipline to carry out the actions you predetermined prior to investing, stop points, target points and be patience points. Keeping your emotions out of the decision is the reason you put in the effort/research up front to determine each before the emotions of the market moving prompts emotional decisions. The adjustments to be made moving forward are then a matter of formality in light of the predetermined objective driving the decisions.
All of this activity and adjustments repeated over and over again are what builds good habits in the process of trading your money in the financial markets. Let the trend be your friend both short term and long term in building a defined strategy for investing and trading your money. Don’t forget to step back and take a bigger view to keep it all in perspective. There is still plenty of work to do short term before we can define the impact on the longer term trend. One day at a time, one trade at a time and one goal at a time. Keep your eye on the prize.