When the Going Gets Tough…

Trading is never easy. But sometimes, it can be downright impossible.

I would classify the current market as a difficult trading environment. The major indexes may have set new highs last week, but little to no follow-through has been the frustrating factor.

The S&P 500 finally broke its February high of 1,344, signaling that a move even higher could be in the works. Ideally, traders want to see confirmation of new highs.

The Russell 2000 — the most visible small-cap index — is the perfect confirmation vehicle for small-cap traders. In order for the Russell to confirm the S&P’s new high, it would have needed to break the 859 mark. Only a day later, the Russell did just that. After a strong close Thursday, the Russell 2000 smashed through its old high to close the day at 861.55.

Despite the overall market reaching higher ground, short-term trades have been tough to execute and even more difficult to time properly. In a flat or rising market, the long-biased swing trader possesses a much better chance of success. What I mean by this is simple: Traders can use the “rising tide” to their advantage — even mediocre trading opportunities can turn into gems.

Strong moves in the overall market in either direction are often amplified in the smallest stocks. But the fact remains that recent rallies are hitting significant resistance and have offered little to no continuation that would benefit a short-term trader. Sure, daytraders are happy with recent volatility and scalping opportunities, but anyone looking to hold a trade for more than 24 hours has probably been disappointed.

With that in mind, here are three trading tips that should help you navigate a less-than-forgiving stock market:

• Tighten Your Stops – Trading in favorable market conditions can allow for wider stops, since you don’t necessarily have to worry about too many external forces pushing and pulling on your stocks. Trends stay intact longer, and maximizing profits becomes the game. Right now, we are not in one of those markets. You need to be cautious— sellers have itchy trigger fingers.

This does not mean that the market is untradable. You simply have to be ready for everything— whipsaws and false breakouts included.

• Don’t Predict – React – During a strong bull market, traders can sometimes get away with anticipating a breakout. The idea is that by buying early, the trader can maximize profits. It may sound like a good plan, but it can be a disastrous strategy in the long run. Never try to predict the market, especially when volatility is a factor. The best traders react to the market’s signals. Only then can you confidently execute a trade and place a reasonable stop-loss price.

• Trade Smart – Don’t try to guess short-term bottoms or blindly buy any dip. You need to respect gravity. Selling pressure can cave any stock, regardless of how strong it has been in the recent past. Honor your stops and follow your trading rules without fail. This is the only way to insure consistent success.

Sincerely,
Greg Guenthner
Penny Sleuth

May 4, 2011

When the Going Gets Tough… was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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