When Markets Turn
The last few days have brought us face to face with some red candles in all the major indexes and in effect some higher swing pivots. This comes after a pretty solid extended up move in the vast majority of these same indexes. These red candles always bring some emotions to the surface and some folks get a little nervous and maybe even a little freaked out.
The usual questions bubble up like is this just a garden variety pullback or are we due for something more sinister like the drop we experienced in March of last year. It’s these questions that cause traders to do all sorts of crazy things like flip from being a perma bull to the nastiest bear possible just in case its more like March and less like a three-day breather in what is an otherwise solid uptrend.
Its this association with the red candles that causes these reactions and its these knee-jerk reactions that can wreak major havoc on one’s trading account. We all have drawdowns after extended runs like we’ve seen recently and it is how you react that determines how you ultimately fair when markets turn and they always turn both down and back up again.
So, what to do when we see red? Think black! Think about the bottom line of your overall account. Remember that if you have had a bullish posture during this extended run then you have most likely had a nice increase in your capital and that a pullback is part of trading and the bottom line is that if you react in a calm focused manner your account will stay intact even with the hardiest of drawdowns.
One needs to think about the bottom line of the overall account and then the bottom line of each individual trade. If one takes a look at each position individually and decides whether your bottom line matches that of the current market movement then the red candles won’t seem so bad.
So, let’s create a new neuropathway in our trader brain that says when we see red, we think black and this can change our behavioral responses to these market changes and it will ensure we do what is best for our accounts.
Chart of the Day
SPY Daily Chart
This index ETF is demonstrating the theme of this communication. We are seeing a couple of red candles and we have put in a pivot at the high point. This turn downward comes after a lengthy run reaching new highs several times over.
Video of the day
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