ChartWatchers Newsletter logo

You Must Master These Two Things To Trade Successfully

 | 

Trading is difficult, emotional and can be quite lonely.  We have seen volatility ($VIX) shoot higher, rising from an 11.61 close on October 3rd to a high of 28.84 on October 11th.  Since then, we've remained above the key 16-17 support level that typically holds during bear markets.  I don't believe we're in a bear market, I'm just pointing out that the last two bear markets saw VIX declines down to 16-17, no further.  Bear markets require a certain level of fear to thrive in.  So far, the VIX is cooperating.  A VIX break below 16 would be a bullish development.


High VIX readings suggest an unusually high level of emotional trading.  Step one to becoming an excellent trader is dealing with highly emotional markets.  You can lose a lot of money in a very short period of time so learning how to cope with such market environments is imperative to maintaining your capital and being successful in the long-term.  Below is a chart of the VIX's 10 day EMA the past couple years:

First, please understand that the above chart is not provided as a tool to catch tops and bottoms.  It's a visual aid in determining the emotional state of the market.  If the VIX 10 day EMA is rising from very low levels, say from 10 or 11, it's very likely a short-term bout of profit taking in an uptrend.  Bull market tops typically are accompanied by a fearful reading on the VIX.  At the January 2018 high, the 10 day EMA of the VIX was roughly 11.  At the September/October high, the 10 day EMA of the VIX was near 12.  When we topped in October 2007, the 10 day EMA of the VIX was near 18.  The market was already extremely fearful.  But bear markets and corrections do the same thing to your capital.  They eat away at it.  You must learn to recognize the high level of anxiety in the market and refrain from overtrading it.  I love to make money trading in the stock market.  But I have to say that sitting in cash while the market moves lower is a very close second.  It doesn't make you money, but it increases purchasing power and risk-adjusted returns.

So keeping your emotions in check is extremely important in trading.  The next step is managing risk.  The market is still quite volatile so I pick my spots for trades and I keep my stops very tight.  I also tend to exit very quickly if I have profits.  Why?  Because you literally don't know what you're going to wake up to the next morning when emotions are running high.  Take the money and move to cash and live to trade another day.

Earlier this week, I sent out a Trading Places blog article late in the day.  Those who follow my Trading Places daily blog on a regular basis know that an article late in the day is a rarity.  I've done it maybe 2-3 times over the past few years.  But I saw a trade set up nicely, made the trade and quickly put together a blog article in real time to help explain why I made the trade and how closely I would monitor it.  Here's the article from Wednesday, "Trade Setup - Tandem (TND) In Real Time", if you'd like to read it.  Also, if this type of analysis appeals to you, I provide Monday setups at the beginning of each week.  Be sure to scroll the bottom of the linked article and subscribe for FREE by providing your email address and clicking the green "Subscribe" button.  All my blog articles will be sent to your email address the moment they're published.  It'll ensure that you receive articles like the one from Wednesday afternoon on a very timely basis.

On Monday, November 19th at 4:30pm EST, I'll join John Hopkins, President of EarningsBeats.com for an educational event.  You'll need to be an EarningsBeats.com member, but you can CLICK HERE for more information on registering.  For those that are StockCharts.com members, John has indicated that he will send a copy of EB.com's Candidate Tracker (similar to my Strong Earnings ChartList).  That'll provide you a ChartList of more than 200 companies that beat Wall Street's revenues and EPS estimates in their latest quarterly earnings report.

From that Strong Earnings ChartList, I will be providing my favorite 10 stocks and my strategies for trading them in upcoming weeks.  I look forward to seeing you there!

Happy thanksgiving and happy trading!

Tom

Tom Bowley
About the author: co-founded Invested Central and served as the site's Chief Market Strategist for more than 10 years. His unique trading style combines both his fundamental and technical strategies to systematically manage risk while trading. A regular contributor to StockCharts.com's bi-weekly ChartWatchers newsletter since 2006, Tom's role at StockCharts has expanded significantly since he joined the company as a full-time Senior Technical Analyst in March of 2015. Learn More
Subscribe to ChartWatchers to be notified whenever a new post is added to this blog!
comments powered by Disqus