Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

morpheustrading

How To Avoid The Biggest Mistake Traders Make In A Bull Market

Recommended Posts

After the October 17 breakouts to new highs in the S&P 500 and NASDAQ Composite, I got to thinking about bull markets.

 

I was pondering over how much traders and investors must be loving and profiting from this powerful rally stocks have had in 2013.

 

But then a worrying thought popped into my head.

 

It occurred to me it’s quite possible that not all traders and investors have actually been raking in the trading profits, despite the major indices being at new highs.

 

Why? Because I fear that many traders and investors have been feeling the pain of the biggest mistake traders make in a bull market.

 

I’m speaking from personal experience when I say it’s a very real concern.

 

I’ll tell you why in just a moment, but first take a quick look at the breakouts in both the S&P and Nasdaq.

 

The October 17 rally in the S&P 500 Index ($SPX) put the index at a new closing high for the year, which is a great sign considering where this benchmark index was only six sessions ago:

 

131018SPX.png

 

The tech-heavy NASDAQ continues to extend above its prior swing high, and has now gained approximately 6% since our September 6 market commentary that suggested another breakout to new highs in the NASDAQ was coming soon:

 

131018COMP.png

 

With stocks on a seemingly unstoppable upward trajectory, it’s easy to get sloppy and make careless mistakes in the stock market without having majorly negative repercussions.

 

Yet, there is indeed one mistake that has some pretty damaging consequences (in the form of opportunity cost), even in a bull market.

 

Have You Ever Made The Greatest Mistake?

 

In a raging bull market such as the present, approximately 80% of stocks and ETFs will be dragged alongside of the main stock market indexes and move higher.

 

Small and mid-cap growth stocks with a strong history of solid earnings growth will typically outperform the percentage gains of the S&P 500 and Nasdaq by a wide margin.

 

These are the same stocks we focus on trading in bull markets.

 

But even if you fail to buy the best stocks in the market, you can basically throw a dart right now and still have a good chance that the stock you buy will move higher (note this only applies in healthy bull markets).

 

Nevertheless, roughly 20% of stocks and ETFs will still fail to move higher in a bull market.

 

Obviously, it is a frustrating experience if you make the unfortunate mistake of buying one of these dogs.

 

Yet, this biggest mistake is surprisingly common among traders, especially newer ones.

 

So, let’s talk about an easy way to avoid this problem.

 

Failing To Overcome Gravity

 

When I was a new trader many years ago, I’m not ashamed to admit that I intentionally focused on buying stocks and ETFs that were NOT rallying alongside of the broad market (showing relative weakness).

 

Why? Because I wrongly assumed they would “catch up” to all the other stocks in the market.

 

Furthermore, I mistakenly thought stocks and ETFs that had already rallied a large percentage would probably not go much higher.

 

Damn, I sure was proven wrong!

 

What was the outcome of buying these stocks and ETFs with relative weakness?

 

I was painfully forced to watch (what seemed like) every other stock in the market rally, while my positions failed miserably to overcome gravity.

 

Adding insult to injury, the leading stocks that I thought “couldn’t possibly move any higher” ended up being the same ones that once again made the biggest gains on their next waves up.

 

The worst part is I also discovered that when a stock is so weak that it fails to set new highs alongside of the broad market, that stock is typically the first to sell off sharply (often to new lows) when the broad market eventually enters into even the slightest pullback from its high.

 

Once in a blue moon, a stock or ETF with relative weakness will suddenly start to show relative strength. However, that typically only occurs with the luck of some major news event.

 

Betting on future news that may or may not cause a stock to rally is akin to betting on red or black in a casino (maybe worse).

 

It’s All Relative, And That’s All You Need To Know

 

As momentum trend traders, we focus on buying stocks and ETFs that are making “higher highs” and “higher lows,” along with chart patterns that indicate relative strength to the benchmark S&P 500 Index.

 

In a moment, I will show you about a great way to quickly and easily identify relative strength, but let’s first discuss what relative strength (don’t confuse this with the RSI indicator) actually means.

 

Relative strength - Any stock or ETF that has broken out over the past few weeks automatically is showing great relative strength to the S&P 500 because it has rallied to new highs ahead of the benchmark index.

 

One such example is Guggenheim Solar Energy ETF ($TAN), which recently netted us a 44% gain.

 

On the individual stock side, we are currently showing an unrealized price gain of more than 55% in Silica ($SLCA) since our July 8 buy entry, so this is another great example (we will remain long until the price action gives us a valid technical reason to sell).

 

Neutral - Stocks or ETFs that are breaking out right now (in sync with S&P 500) are also decent buy candidates and may eventually outperform during the rally.

 

These stocks and ETFs may not be as good as buying equities with relative strength (on a pullback), but can still offer substantial returns.

 

One such example is Direxion Daily Semiconductor Bull 3X ($SOXL), which we are currently long in The Wagner Daily.

 

Relative weakness - While stocks and ETFs that broke out ahead of the S&P 500 are the best stocks to buy, and some equities only breaking out now may be fine, you definitely want to avoid stocks and ETFs that are lagging behind.

 

I’m speaking from personal experience here.

 

Any stock or ETF that is failing to even keep pace with the current breakouts to new highs in the S&P 500 and Nasdaq has relative weakness. However, don’t confuse this with stocks and ETFs that already broke out to new highs within the past few weeks (ahead of the broad market) and are now building another base of consolidation.

 

A Tool To Stop Being A Fool

 

The good news is there’s a simple tool that enables traders to quickly and easily spot patterns of relative strength and weakness.

 

This tool is a great way to know which stocks and ETFs to avoid right now (the 20% mentioned earlier).

 

Surprisingly, the tool is utilized by simply comparing the daily chart patterns of any stock or ETF versus the S&P 500 Index.

 

The chart below, comparing the price action in a Real Estate ETF ($IYR) against the S&P 500 ETF ($SPY), clearly shows how this works:

 

131018IYR.png

 

It’s as simple as that.

 

If you thought our tool for spotting relative strength or weakness was going to be complicated, I’m sorry to disappoint you.

 

However, our proven trading strategy has always been about keeping our analysis of stocks simple, and this tool is in line with that philosophy.

 

Putting The Wind On Your Back

 

Notice that we compared an industry sector ETF (real estate) to the S&P 500, rather than an individual stock.

 

We did this because it’s a great way to determine if a particular industry group or sector has relative strength or weakness.

 

This is important to know because you don’t want to buy an individual stock that has a great looking chart pattern, but belongs to an industry sector with relative weakness.

 

If you do, the stock will struggle to move higher, despite its bullish chart pattern.

 

In trading, you always want the wind to be on your back.

 

Making sure the individual stocks you buy are part of an industry sector with relative strength (or at least not with relative weakness) is one of the most effective ways to do so.

 

Now that you know this highly effective and easy way to eliminate stocks and ETFs with relative weakness from your watchlist, you have no excuse for continuing to make one of the biggest mistakes traders make in a bull market.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Similar Content

    • By millonmethod
      Hello everyone!
      I am an advanced trader, with many years of experience (about 15 years - 10 living exclusively from this)
      I am going to give you some tips that you must know:
      There are going to be many people who tell you that trade is easy, that with only crossiing a line  with another one you will win a lot of money.... and that´s not true.  No, Sir, reality is far away from that. Many people who start arrive here with the hope that someone "gives them" a free method, they watch youtube videos thinking that this will give them the "strategy" and in a few days they realize that it does not work for them - they lose money - and then They go looking for a new one ... and so on. YES, IT´S TRUE YOU EARN IN TRADING, A LOT. BUT THINK: for a few to win (10% + any BROKER) many others must lose (90% people). YOU MUST HAVE A MONEY MANAGMENT FORMULA ( you can email me) People study so many years to live on this, not because they are dumb, but to know what they do, when, and have absolute effectiveness. It´s very easy to get lost here: do not disperse, jumping from one to another strategy WILL NEVER give you money, it will only waste your time and make you nervous when trading. PEOPLE WHO CHANGE THEIR METHOD CONSTANTLY : LOOOOSE ALWAYS.   If you have the knowledge to develop it, take your time and do it.  Always try it first on DEMO for at least 2 weeks! If not: search to buy a solid strategy (no you tube videos pleassse ! Avoid losing money! ) This is like any business, it requires some capital to start (capital = money in the broker + solid made /purchased strategy) If you are lost: I RECOMMEND YOU NOT TO WASTE TIME IN YOUTUBE, JOIN PEOPLE WHO HAVE EXPERIENCE AND IF YOU ARE GOING TO BUY A METHOD ... PLEASE !!!! DO NOT BUY 10 BAD AND CHEAP METHODS, SAVE MONEY AND BUY ONLY 1 BUT EXCLUSIVE AND MUST ALLWAYS HAVE SUPPORT !!!!!  Do not buy Signals! They never keep up with constant profits! One week will win and the next will lose. Nothing that does not depend absolutely on you will give you the money you are looking for. And if you do not have a strategy (made or purchased) do not even try PLEASE PLEASE PLEASE: DO NOT USE REAL MONEY! AT LEAST 2 WEEK DEMO FREE HELP HERE!!!!!  IF YOU FOLLOW MY ADVICE YOU WILL BE PART OF THAT 10% WINNER, email me.
      Have a nice trading day
       
       
    • By adamal7
      Hello guys,
      I'm starting to swing trade commodities, especially soft commodities (corn, sugar, coffee, cotton, soybean, ...). I'm also checking gold and oil.
      My problem is I'd like to know what is the best broker for trading those markets (regulated, large commodity choice) ? For CFD trading.
      I'm thinking of IC MARKETS who are very good with forex and have good trading conditions.
      The concern I have is that I need a broker that offers MT4 as a platform, and also I'd like to be able to open mini lots positions for a better risk management.
      As a swing trader, I'm less concerned by the spread but looking at the financing fees.
      Wish you have a nice day, and thanks in advance.
      Alexandre.
    • By trading4life
      Hello, My name is trading4life.
      I just joined this forum.
  • Topics

  • Posts

    • EU is still trading in a range. I'm heading out of town tonight and won't be back until Sunday evening. 
    • Came back to check on price after an hour of meditation, EU came within 3 ticks of target... Fascinating the ego brings up the story of betrayal, as if the market was out there to get me. I then reminded myself cool, this trade went over 2R. Even better yet, I acted consistently with executing my trading plan! Let the market do its thing. 
    • I took this limit long on the retest of the earlier 123 and support area. Target is near top of the zone. I notice that my target needs to be more mechanical in the sense that I may be influence to have a more/less aggressive target based on the results of the last trade. I have collected some modifications for the next batch of trades. 
    • Correction: the GU made it to 45 out of a 49 tick target. It was a 2.5R full target, not 3R. The EU long trade was 7:15am EST. I will refrain from getting up even earlier with the goal of not missing the next one. I notice after each trade, the mind, with the desire of wanting to experience a win, subtly pushes me to deviate from trading plan. My main concern with this set of 20 trades is build a greater sense of consistency in my execution and self trust. I realized the outcome of each individual trade absolutely does not matter. If I started to care about it, I am assuming that somehow I am responsible for the market's movement, which I am not. I am only responsible for following my trading plan, which can be adjusted after the 20 trades based on the stats I collect. 
    • GU closed for -1R. It made it to 2.8R but not quite the 3R. There was also a EU long trade that happened about 4:15am EST. FOMC is over now so let's see if we can get a nice trend setup today.  
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.