Fog of War
Research for Online Investors

by John Dalt

7/07/10

The market is bouncing higher today, to a sigh of relief to many investors.  We have been through a tough ten weeks since the market set a high on April 23rd.  The S&P 500 had lost 16.6% of stock valuations to the low set last week.  Volume has been low as buyers pulled away from opening new positions, preferring to wait for lower prices.

Trying to buy into a market on such a steep decline as the last ten weeks is tough, as every new position seems to immediately go into the red.  Traders look for a support level before opening new positions, then sell when their limit is hit.  How many positions can you open, only to watch every one of them stop out?  It causes a trader to lose confidence and his bearings due to the Fog of War!

Sometimes you may elect to “average down” a loser.  This lowers your cost basis in the position, but now you have twice as much money committed.  If the market continues lower, it most likely will drag XYZ company with it, compounding your losses.

After a few of these experiences, even the most experienced traders feel like they have a tiger by the tail, and just want some relief.  Relief cannot be found on the short side.  Every short carries risk as the market ratchets down; the inevitable mini-rallies bounce oversold etfs and stocks through stop losses.

What can a trader do?  I liken it to a craps game.  Sometimes you have to walk away from the table, have a cup of coffee and clear your head.  If you wrote down your trades before you made them, then you can review the premise of each trade.  What made the stock attractive?  Where was support?  What stop loss did you use?  Did you automatically close the trade when it went against you, or did you change your mind in the middle of the trade?

Only after reviewing your past trades, can you move forward.  Search for the right set-up; define your potential losses with a stop loss set to end the pain before it becomes painful!  You should also know your plan if the stock moves higher.  What is your goal?  Will you follow it up with a $trailing stop, or set a sell target?

There are advantages to both strategies.  Using a $trailing stop adjusts your sale price higher as the market advances.  You will stay with the trade as long as it is moving higher, when it reverses and hits your $trailing stop you are automatically sold out of the stock.  This is a stop that you enter in your computer trading platform, it executes without your second guessing the action.

Setting a sale target has merits also.  Based on technical analysis you may easily see resistance and set a sale price just below this level. When your stock climbs close to resistance, your computer program sells the stock at your sale target.

In either case, you made your decision before the trade and let it run according to plan. You may change from one strategy to the other during the trade as the market gives you more information, but either way a plan is in place to take profits if available.

You will almost never sell at the top nor buy at the bottom, so enjoy the experience when you take some out of the middle!  If you would like to dip your toes in the trading market, now is a good time to sign up for SwingTrader.

Even during the worst of the market downdraft, we have still eked out a small gain for our subscribers.  We were profitable in May and June.  You can read more about SwingTrader.

We don't like this chart.  There is more pain ahead.

Risk is what you control, gains are what you take!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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