The Pillars of Your Market Philosophy

Thought this would be a fun thread to create.  Over the years we all accumulate various pieces of knowledge, some which become essential foundations to our trading which we know to be certain. Who knows, maybe via this thread you'll be able to fill in a gap that's been missing or a belief that's been holding you back my finally be undone.

I'll lead off with by far and away the most obvious ...... don't trade against the market.  As a trader it took me a very long time to finally accept this concept.  I would stubbornly approach every single day looking for the long side on my creek/pinch plays.  Granted a very small percentage of equities will move against the market trend, but statistics have shown over 80% of equities move WITH the market.  Think about those odds for a moment.  It's primarily the reason for pattern failures, no matter if it's a pinch play, bull flag, bear flag, etc etc.

I'm sure you're all familiar.  We tend to project the success of one trade onto another because they "look similar".  We feel really good when the setup worked, then when it failed on the next one we're left baffled.  How could this be?  They looked so much alike!  Stocks all have different behaviors, but most importantly the market influences their success or failure.  I've personally kept a chart of the SPY up at all times as well as a $TICK chart.  Some people recommend watching the futures, but I feel like since SPY is basically mimicking the /ES then what is the point?  I might be wrong on that, so if I am feel free to correct me.  

Essentially though, this is what they refer to as the "Top Down" approach.  I feel it's extremely important for every trader to first ask "What is the market doing" before ever entering a trade.  Fundamentals can be valued over the more longer haul, but essentially that comes down to a "time" issue.  At some point in time the stock will hit it's fundamental valuation, but when that happens is anyone's guess.  Market cycles could also impact that time frame ..... are we in a buying cycle or selling cycle?    

Quote:

Originally Posted by tones 

during a rally & you have a long position, keep it 'till EOD. <-- during normal market conditions

 

during sell off & you're short, keep it 'till EOD. <-- during normal market conditions

 

you may "leave some cash on the table" but the probability of increased profits increase

 

^^ that's advice my futures & options professor gave us, but he cancelled class on a regular basis b/c he was busy traveling to NY to trade in the pits.

 

i wish i knew wtf futures & options were back then.. i prob. woulda learned something. i only took it to fulfill requirements and it fit my schedule at the time. what a waste of tuition money

Thank you for contributing Tones.  

When price and volume surge, the rally is being sold into by institutional traders who were previously embedded.  There is no exception to this rule. Richard Wyckoff referred to them as "The Composite Man".  So understand this concept when you attempt to buy something that is moving, in particular "rallies".