When an event repeats frequently, it becomes a pattern. A pattern, in which a lot of people wholeheartedly believe in and act upon. Buying oversold dips in the major indexes has been very lucrative in the past few quarters. Even more so, in the past few months, which have been a poster child of range-bound markets. Will the current dip be any different? No one really knows. There are some good reasons to believe so:
– seasonality;
– poor reaction to decent earnings reports;
– lack of great long setups;
When in doubt, stay out. When there are both good bullish and bearish arguments, it is better to give priority to capital preservation. If we flatline our equity curve during choppy periods by minimizing our drawdown, we could grow our capital a lot faster. Here’s a chart from a book I published last year – The 5 Secrets To Highly Profitable Swing Trading.
I truly believe that knowing when to be out of the market is the single most valuable trading skill anyone could develop. Why do I think so? Because, when markets are trending most setups work, most breakouts work and have a decent follow-through, it is a lot easier to make money. When markets are choppy, everything turns upside down and it is becomes difficult not to lose money. Be aggressive when it pays to be aggressive. Make sure you don’t give back most of your gains when the market environment worsens for your approach. For better of for worse, financial markets are one of those business fields, where working smart always trumps working hard.
