It’s a question all good traders find themselves asking on a regular basis…
“Has the easy money been made?”
Sometimes it’s in regards to an open position which has stalled out or losing momentum. Other times it’s tied to a look at the overall market, trying to determine whether or not the current move still has some fuel in the tank.
Indeed, few questions in trading are as important as this one.
As you evaluate your own trades, this is the question which will most often be your deciding factor in what to do. Perhaps you’re eyeing a nice setup for an entry… is the risk/reward structure as it should be? Or maybe you’ve been in a position which is warranting a second look right now… do you stay in, jump ship, or tighten stops due to a lack of trust?
How Do You Know?
Watching the rhythm of a stock’s (or market index’s) movement over time, and particularly the recent action, can provide you with some excellent clues as to what’s really taking place. Every stock has a personality [1], and your ability to decipher it will ultimately prove whether it’s trade-worthy [2].
Suppose we’re eyeing a rally which is underway and we’re trying to decide if it’s likely to continue. Gauging the upside volume compared to the downside volume can offer us some important clues. We can also glean a lot of useful info with a close look at the pace of the advance – is it sustainable? Measuring the depth of the dips, the quality of the rest phases, and of course the upside acceleration as strength resumes is going to complete the picture and leave us with some crucial elements to consider. Weighing each of these is what will ultimately bring us to action (or inaction [3]).
A Fork in the Road
Whether it’s the current market move off the July lows, or any single position you are evaluating, always seek to determine if the easy money has been made.
If your conclusion is yes and you’re concerned the current wave might be closer to the end than the beginning, then be extremely cautious and keep any new trades on a very short leash. You might just be in the midst of one of those times when discipline and patience is needed while some new bases form in the charts.
However if your conclusion is no, then keep working your watch list [4] in search of swing trading [5] candidates which can leave you properly positioned should the move continue.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com [6]