Previously in Part 1 , we took a look at some of the suffering caused by market meltdowns and the general idea that steps need to be taken to avoid getting flattened when you find yourself caught on the wrong side of such moves. In this post, we’ll take a look at some specific measures to take in order to not only recognize those moves as they begin, but also to avoid having a major setback to your trading account.
I’ve taken plenty of hits as a result of bad or mistimed trades, and I’ve also found myself poorly-positioned for some big moves over the years. However, I’ve yet to blow out a trading account after having been in the market for a decade. I’ve avoided really bad luck, yes, but I’ve also made a habit of doing several things which helped to ensure my survival as a trader. Here are 4 of them:
Monitor Key Levels
Whether you more closely watch the futures (NQ & ES) or the averages themselves, there is no substitute for keeping an eye on important support and resistance levels. Few things have the ability to influence individual stocks the way the overall market does, which is why it’s not something to be ignored. Keep in front of you levels like 52-week highs/lows, the high/low of the prior week and month, and of course those zones which keep being tested on both the upside and downside. As you see them get broken, it’s an excellent signal that the stocks you’re watching may soon follow.
Watch Chart Patterns
Gaining an understanding of even basic chart patterns  will be of tremendous benefit to your trading. They will not always work without fail, but they can give you a very meaningful heads-up to what is taking place out there. Even respecting the price action itself, such as light-volume bounces after heavy distribution, will give you an edge which can be exploited to your benefit. Monitor not only the patterns found in your stocks, but also the major averages too. Patterns provide reliable signals across markets and timeframes, so they’re certainly worth watching.
Pay Attention to Psychology & Be Sensitive to Sentiment
Many people will tell you to always be fading the prevailing sentiment, but that’s not sound advice. After all, within a trend the crowd will be correct – for a while. It’s better stated that when sentiment reaches extremes, it might then be time to start considering a reversal (such as Monday’s highest close in the VIX – a measure of fear – since August 2002). Until then, recognizing frequent hints such as repeated failed bounces will afford you an added degree of awareness, helping to provide you with a useful directional bias (even if it’s a flexible one).
Take Clues From Trades
Although it has been said that nothing is new on Wall Street but the faces and pockets, the fact of the matter is that cycles do emerge and disappear periodically. Certain trade types will work great for a while, but then another method becomes more reliable. Taking notice of trade types and/or the patterns which are working best for plays will pay big dividends for the astute trader. Those who are continually on the lookout for which kinds of plays are ceasing to work will be miles ahead when it comes to knowing what setups to avoid, thereby helping to keep your account intact. If and when you begin to notice failed breakouts or breakdowns, it’s your clue to proceed with added caution.
Look Beyond the Spots on the Windshield
It’s inevitable that there will be losing trades, good trades which go bad , and there will be times when each of us will be caught on the wrong side of a trade or the market in general. During those times it’s easy for frustration to swell quickly, causing you to press harder until confusion reigns supreme. In the end, all you really want to do sometimes is throw up your hands and step away for a little while – and that can at times be the best solution.
I’ve witnessed traders who refused to move out of the way when they knew they should take cover, and it wasn’t pretty. The refusal to accept a small loss left them ever more committed to the trades which were costing them increasing amounts of money. The result was an added psychological attachment which did anything but help them.
The ‘storms’ which impact your trading in a negative way might be massive selloffs like we witnessed on Monday, or they might simply be those stretches of trading when you’re not at your best.
Either way, the idea is to avoid letting occasional bumps and bruises turn into irreversible harm. Taking those hits is never fun, but in order to be successful over the long haul you must learn to minimize the damage. Small mistakes  are the key, so keep that in mind the next time a big move begins which you’re caught on the wrong side of.
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]