Trading Basics: Evolution of a Trader

WHAT WAS THE MARKET BEHAVIOR?

After years of trading chart patterns, I realized how important the market trend is to the success of a trade. In Fundamental Analysis and Position Trading, Chapter 19 (see the section titled “What is Market Influence on Stocks?”), I will discuss research that says a stock follows the market higher or lower 64 percent of the time. Why would you go against those odds?

• Increase odds of success and profitability by trading with the trend.

It does not matter how much the market trended before entering the trade only to see it reverse after placing money on the table. Guessing correctly that the market has turned in a direction that supports a trade is important to success. I will discuss proof later.

For completed trades, assess how the market fared while holding the stock. Compare the closing price of the S&P 500 index on the day you sold to the day you bought. If the market is up a lot over those two points (or down a lot), then the market trended, suggesting it acted like a swift current pulling your boat along for the ride. If the market moved little then that suggests a sideways or trading range market. A trading range market is not bad for swing traders, but you still need to surf either an up or down wave.

What you are looking for is a way to determine the market's future direction before you buy.

• Did the trade direction (long in an up market, short in a down market) agree with the market direction?

One easy way to guess the future market trend ...