The Trend is your Friend

The markets have had everyone confused for many months now with all the bad news and volatility. Just when everyone expects there to be a strong move down because of all the bad news in the financial sector, somehow, the resiliency of the market comes through and proves the majority wrong with a strong move to the upside instead. These moves sometimes end up scaring the weak shorts out of their trades and they end up just getting whipsawed in and out.

These strong moves up, like Friday, could be just bear market rallies but nevertheless, if you are caught short during one of these rallies, you end up losing money on a day when the market goes higher. Nobody likes to lose money but when you lose it when the market is going up, it is the worst possible scenario that could happen.

A Post on our Board from Friday
Here is something I posted to the StockTradersHQ.com message board on Friday about being caught short on a big up day. In case anyone missed it, I think it warrants repeating.

“One thing that I have always hated to do is lose money when the market has a big up day like today. I can accept losing money if I am long and the market goes down but if the market goes up, I can't stand to lose money by having short positions on. This is probably the biggest reason I don't short much. We never know when a short covering rally or a technical bounce in a downtrend will happen and if you get caught short, you lose money on an up day and for me, that is unacceptable”.

Why is that post important?

It is important because I want people to realize why I don’t fight the trend. Whether that trend is only for a day (trend day) it is still a trend albeit small. You will rarely see me post a day trade short position no matter which way the market is trending for the day. If the market is trending up, I go long (Not short). I never fight the trend and I never try and pick a top to short, no matter how much resistance I see on the chart. Why? Because momentum can at times dwarf all resistance levels and blast through them, overshooting on the upside, taking out the stops of the short sellers. When the market is trending down for the day, I will only short stocks that are also moving down. I will not short the stocks that happen to be moving up that day. Instead, I may get long those stocks that are showing relative strength that day when all other stocks and the market are heading lower. My positions in these stocks going up on a down day will be smaller than normal because even though the stocks are moving up with momentum, they are still moving against the market for that day so those trades are of greater risk.

Personal Preference

Obviously, it doesn’t matter whether the market moves up or down as long as you are on the right side of the market so it shouldn’t matter either way but for me, it’s more of a psychological factor. Since it is a statistical fact proven over time throughout market history that the market spends more time going up than it does going down, the logical position to be in when playing the odds is to be long the market rather than short. For this one reason alone, it is a cardinal sin for any good trader to lose money when the market is going up. For me personally, I can accept losing money, when the market goes down if I happened to own stocks. But it is unacceptable for me to lose money on a day the market is going higher.

Please understand that I’m not against shorting stocks, it is just a personal preference of mine to be on the side of momentum. I want to make it clear to members so that there is no confusion; so for my personal day trading activities, I will always be long on days the market is moving higher. I will sometimes be long the stocks of the day that are moving up even if the market itself moves lower for the day. And I will sometimes be short but only short the weak stocks moving down when the overall market is moving lower that day.

David Colletti
Founder
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