On the topic of trading with the trend versus counter trend:
1) Relative Strength. Certainly, strong stocks can go up in down markets and weak stocks can go down in up markets. It's a "relative strength" issue. However, it is much more difficult for even strong stocks to go up in down markets than it is for them to go up in up markets.
2) Tide analogy. Think of the broad market as the tide. Certainly, a strong swimmer can swim against the tide, however, he will run out of energy sooner (have to rest) and while resting the tide will be carrying him backwards. Then he will resume, albeit slowly. Trading stocks that buck the trend can be done but the retracements are sharper and happen faster. I believe it is much more useful to identify those stocks which are able to buck the trend and then use them to trade when the tide turns. The gains will be disproportionately higher.
3) Countertrend trading. The best countertrend trading is done when there is a strong over-reaction (CSCO rumor two weeks ago). When there is a severe sell off that is way over done playing the bounces along the way is a low risk high return play but as was stated by someone, it is a very short term play. Not a swing trade.
4) Tracking the trend. My experience has been similar to Alan's regarding trading with the trend. It is much easier to maker larger gains when paddling the canoe with the current. I use a "trade blotter" to record my trades during the day, but also to monitor general market direction. I record DJIA, SPX, VIX, TICK, and TRIN every 30 minutes throughout the trading day. (I stole the idea from Marty Schwartz "Pit Bull".) Since I started doing that, it forces me to keep my eye on the bigger picture as well. It has improved my winning percentage tremendously. For example, if I can see that the general market trend has stalled, I'm quicker to take profits on each little "flash" rally. The ones that used to suck me in, now I know are going nowhere. This exercise has been extremely useful to me in improving my trading. FWIW.
Matt |
