Monday, October 19, 2009

Tip of the day

How many people would like to improve their trading accuracy? Dumb question right? Of course everyone would like to improve their accuracy.Well I'm going to give you a very simple strategy to do just that.

Let's take a guess and say the average career of any trader is probably 30-40 years. If you could improve your overall performance by a mere 10-15% over that period of time how much money do you think that would end up being? My guess is it would be a small fortune.

So how does one go about implementing this strategy you ask?

It's simple, never trade against the larger cyclical or secular trend.

It's as simple as that. As long as you always trade in the direction of the major trend the odds are high that most trades, even if your timing is off, will eventually be rescued by the secular trend.

On the other hand when you trade against the market and miss the timing the secular trend will often exacerbate your timing mistake. You can't count on any bailouts if you are going to fight the market.

So in a bull market (an upward sloping 200 DMA) the correct strategy is either long or cash. Shorting bull markets is a risky strategy and one that is probably going to win less than 50% of the time.

In bear markets (a downward sloping 200 DMA) the safest strategy is in cash. However bear markets operate a bit different than bull markets. They tend to get very oversold and buying into these panic lows can produce some of the largest and quickest gains on the long side. It seems strange that the biggest gains come in bear markets but that's how bear markets work.

Despite that, one still needs to have an exit plan if going long in a bear market because the secular trend is down. Selling tops is still the correct strategy.

Simply not trading against the major trend will probably be the difference of averaging a 60-65% win rate vs less than 50% for those that heed the siren call of the counter trend trade.