As the benchmark S&P 500 Index soared past 2,900 in September, lots of folks were bullish.
Then, stocks plunged 20% in three months. And by late December, almost everyone was bearish.
Maybe you went against the crowd at the right moments and booked big gains…
Or maybe – like a lot of other investors and traders – you were caught off-guard.
Either way, that’s now in the past. And you need to re-evaluate…
So today, I’m asking you, “Are you bullish, bearish, or confused?”
The answer is important. As I’ll show, it can guide your trading decisions in more ways than you might expect…
As a trader, you should have a working thesis for any asset class you trade.
Stocks, bonds, gold, cash… What do you expect to happen in the short term? What could go wrong? How wrong? What should and could happen over the intermediate term… and the long term?
Your expectations should guide your trading behavior.
It may sound obvious. But lots of traders don’t take the time to think this through. They hear a compelling idea, place the trade, and that’s it.
But “the trade” can take different shapes…
For example, let’s say you decide an asset is in a long-term bull market, but due for a pullback in the short term. You could just buy for the long term and forget about the short term. But then you run the risk of stopping out of your position on a pullback you expected.
That’s no good.
Instead, you could wait for the pullback before you buy. But then, if you’re wrong about the pullback, when will you buy? You might miss out altogether.
So what do you do?
One solution is to buy a half position. You can buy the other half on the pullback, if it does come – or if not, when the asset continues higher. You won’t get the absolute best entry price either way, whether you’re right or wrong about the pullback. But that’s OK…
One benefit of this strategy is that you can use a wider stop loss on the half position, without taking the additional risk that would come with a full-sized position. This makes it less likely you’ll stop out on a pullback.
Another benefit is that if you’re wrong about the pullback, you at least have half of a position. And when you add more, your average entry price will be better than if you hadn’t bought earlier.
Is this the same as trying to time the market?
No. It’s the exact opposite. It’s developing an understanding of the risk that comes with time – market volatility. Once you have this understanding, you can use it to adjust your trading strategy, and to account for the risk.
So back to the opening question… Are you bullish, bearish, or confused?
Most folks are confused. The market has taken a wild ride since this time last year. Will the next big move be higher or lower? Nobody knows.
But confused doesn’t have to mean paralyzed. As long as you know that you don’t know, you can work with that. You can find great opportunities… trade them cautiously… and profit.
If you don’t have a working thesis, though… if you don’t expect some sort of price behavior, over different time frames… you can’t do any of this. You’re trading blind.
My advice: Hear the bulls out. Hear the bears out. And come to your own conclusions. Then, use your ideas to gain an edge in your trading.
Source: Daily Wealth