This column was originally published on RealMoney on Dec. 6, 2007 at 1 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
It's December and getting close to the time when traders need to wrap things up and evaluate their
loss performance for the year. Unfortunately, most folks
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speculating on the financial markets in 2007 face major disappointment when they look at their results and realize how tough it's been to make money.
Sadly, most traders follow the same worn-out strategy over and over again, regardless of market conditions. They just buy upside
momentum and hang on, hoping the bottom doesn't drop out of their positions. But as we know in this
volatile trading year, almost every sharp move higher or lower has been followed by a vicious counterswing.
It's easy to dismiss this ragged
price action, believing it's just an aberration in an otherwise perfect bull market, but nothing could be further from the truth. In reality, a choppy and dangerous tape is the most common environment in which traders need to
capital and book results.
That's why the concept of
market-timing is so important. Regardless of short-term conditions, every position is forced to negotiate a minefield of conflicting time elements in order to book profits. Simply stated, it's the gateway through which you take on monetary and emotional risk.
So what's the best timing strategy for your next trade? Unfortunately, the correct answer changes over time. As a result, market players must plan each trade within the context of the current environment, reward-to-risk profile and pre-chosen
holding period. The good news: This extra effort pays off handsomely on their bottom lines.
Had a tough year picking your fights and choosing your exits in 2007? Well, it's time to shake it off and get ready for the new year. To help you get things started on the right foot, here are 10 things you can do to improve your market-timing.
Sell Rallies: Stop selling short into selloffs. Instead, wait for weak rallies to fail at resistance. Then use the breakdown of a two- or three-day topping pattern to enter your position.
Play Pullbacks: Pullbacks work in all kinds of market conditions, so use them to take on all kinds of exposure. Stand aside when a new trend gets under way and stalk the chart until a counterswing forces price back to the level where you wanted to play it in the first place.
Enter in Quiet Times: The best time to enter a position is just before a breakout or breakdown. That way you can sell your position for a nice profit after other traders trip over themselves to get on board. Find these setup points using narrow range and volatility contraction patterns, like Wednesday's Dec. 3, 2007 NR7 (narrowest range bar of the last seven bars) on Intuitive Surgical .
Follow the VIX: The most profitable trades show up when the crowd is leaning the wrong way. How can you see this happen in advance? Become a student of sentiment and track the Market Volatility Index for reversals after sharp peaks and valleys.
Keep Sector Lists: A rising market floats all boats, even the leakiest ones. But in tough times, it's wise to play the strongest stocks in the strongest market groups. To this end, keep sector lists that show relative performance on a weekly basis, and then limit your trade search to the cream of the crop.
Mark the Gaps: Watch the gaps on the major indices and assume every one will fill, sooner or later. Avoid aggressive trade entry after a gap unless the market is in a running trend. Expect indices to turn on a dime as soon as a gap gets filled because smart traders use these pivot points to take profits and establish contrary positions.
Match Time to Opportunity: Decide your holding period before you enter the trade, and then stick to it. Are you scalping, daytrading, swing trading or picking up an investment for the grandkids? Keep separate trading accounts if you want to do all of the above.
Exit in Wild Times: Take profits in high volatility, whenever possible. Prices move through relatively narrow boundaries most of the time. Wide swings, triggered by greed or fear, open the floodgates and let the market move very big distances over short timeframes. Use these magic moments to book your profits and jump back to the sidelines.
Track the Pivot Points: Focus your attention on prior highs and lows, whether they're two days old or printed in the last decade. Traders use these focal points to make the majority of their entry and exit decisions. Learn to wait for the second test of a high or low, rather than jumping in too soon and getting stuck in a double-top or bottom reversal.
Read the Tape: The numbers on your trading screen are far more important than the pretty pictures they draw on the charts. Memorize key levels on your favorite stocks and then watch what happens whenever price approaches one of these inflection points. Yes, tape-reading takes years to learn, but it gives you a lifetime edge, so it's worth the effort.
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At the time of publication, Farley had no positions in any of the stocks mentioned, although holdings can change at any time.
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;
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