How to Make Good Things Happen on Bad Days

A good trend is hard to find. In fact, in 2005 it's been nearly impossible. It seems every time the indices hit a prior high or low, they turn tail and jump in the other direction. What's a swing trader to do?

Although shifting markets are frustrating, this seesaw action is the norm rather than an aberration. Prices move in sustained trends less than 20% of the time. It just so happens that we've been stuck in the other 80% for most of this entire year.

When markets dance around like crazed squirrels, you might think there are fewer ways to make money. But this isn't true. When one door closes on Wall Street, another one opens immediately. So let's look at a few strategies that might work in this environment.

Trading profits depend on market inefficiency. This is an obtuse statement that has many practical applications. Let's see how it works in real life.

A handful of traders recognize the first stages of a momentum market. These early adapters have the playing field to themselves when prices start to move substantially higher or lower. They trade without competition, and the market responds with dependable profits.

But this trading edge doesn't last for long. Each uptick captures the attention of more players, until everyone wants a piece of the action. This slams shut the inefficiency door, making that strategy a more dangerous enterprise.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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