Is the Trend Really Your Friend? Here’s the Answer…

The trend is your friend…

You’ve heard it before. Everyone has.

Why’s this market adage so famous?

Because it’s true. Markets trend. It doesn’t matter if you’re a value investor, swing trader, or stargazer. Markets are like the ocean’s tides. Individual waves pull back and forth—but they can only fight a rising or falling tide so much.

Any damn fool can make money in a rising tide. But how about when the tide’s falling? Or sideways? Different story.

It’s been a long time now since we’ve felt the undertow of a strongly trending market. It feels like there’s no trend to befriend at all these days…

Up, down. Down, up. Sideways. Sideways again.

But today you’re going to learn exactly how to play this rudderless market.

This market’s not just frustrating for traders. Investors have also felt the squeeze. If you bought the S&P 500 SPDR (NYSE:SPY) 18 months ago, you’d be sitting on a 1% loss right now.

But that 1% loss only tells half the story…

Pull up a chart of the S&P and you’ll see the wild swings it put in over those 18 months:

S&P 500

Not exactly a perfectly trending market…

The past 18 months have been a grind. Sure, a handful of stocks and sectors have made significant moves (higher and lower). But overall, traders and investors have been dealing with extremely choppy action from the major averages.

Compare this to the market in early 2013 and you’ll see exactly what I’m talking about:

Those Were the Days

The S&P 500 jumped 30% back in 2013. Compare the two charts and you tell me which market was easier to trade. Get it wrong and it’s time for a new hobby…

But as I’ve told you before: this grind won’t last forever. And you won’t be stuck booking small losses for the rest of your trading career. So don’t feel like you have to do something right now. That’s easy to say. But staying patient is the big psychological hurdle to overcome for an active trader. It’s critical…

Don’t fight the market. If it’s not giving you a green light don’t hit the gas. And don’t load up on any big bets right now – short or long. You should use this downtime to build a watch list of good stocks you’d like to buy at the right price.

And until we see a clear trend higher or lower all your trades should be smaller-than-average position sizes.

There’s nothing wrong with buying a position half your normal size. And don’t worry if you find you’re getting stopped out. Remember: better to gain a little than lose a lot. Or lose a little than lose a lot.

And don’t fall for temporary market feints – up or down – just because they confirm your bias. After this month’s tumble, we’ll need to wait and see if a clear trend forms. Over just the past few trading days oil and the major averages have pinballed wildly. Anyone betting big, long or short, lost fingers as the market immediately sawed in the opposite direction.

So the best thing we can do right now is to remain ultra-selective with our trades. Yes, we’re going to get stopped out on some of our efforts. And we might even get a little antsy riding the pine. But if we stick with our rules and stay disciplined in this up, down and sideways market, we’ll come out the other side of the storm riding high in the water.

Calmer waters are ahead – I promise. Stay patient.

Sincerely,

Greg Guenthner
for The Daily Reckoning

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