A Few Trading Lessons

• Posted by Joe Fahmy
• on December 14th, 2011

This past weekend, I wrote that we could see a potential market rally over the near-term. Since then, the market has dropped 3 straight days and none of the stocks on my watch list triggered upside buy alerts. As I mentioned in my post, I have no ego when it comes to the stock market. It doesn’t bother me when I’m wrong because no one can expect to be right all the time. Being wrong is just part of the game.

Here a few lessons from this week’s market action:

1) When you find a great number of trading setups (as I did this past weekend), let the market prove itself first before getting in aggressively.

2) Wait for a Follow-Through Day (FTD) to confirm that the market is in a new uptrend. A FTD is when the market has a convincing up day (approximately +1.5% or greater) on strong volume. This usually occurs on days 4-10 of an attempted rally. There is nothing wrong with trying to anticipate such a day (as I did over the weekend), however, you still need to wait for the day to occur.

3) It is ok to be wrong, but it is not ok to STAY wrong!

4) Even when we get confirmation of a new uptrend, don’t be in such a rush. If it’s a true rally, the market will give you plenty of time to make money. Remember, the fear of missing out is the downfall of most traders.

5) Cash is still king right now, especially because we are below both the 50-day and 200-day moving averages on the NASDAQ Composite. Keep in mind that 4 out of 5 stocks move in the general direction of the market, and right now we are still in a downtrend.

Bottom line, there is nothing wrong with forming a market opinion based on the information it gives us. The key is to wait for the market to confirm your opinion before getting aggressively involved. And finally, if you are wrong, it’s no big deal because it won’t be the first or last time it happens.